What are investors backing with their Isa? Best selling funds

While a fund or trust’s popularity isn’t an indicator of success, it’s always interesting to see what others are buying as the Isa season comes to a close.

Inflation remains investors’ biggest concern as it eats up piggy banks and forces them to look for funds and trusts that make their money work harder.

It means that investors were looking for dividend-paying investments to add to their portfolio to provide reliable income and capital appreciation.

Ahead of the Isa deadline, markets have been agitated by the fallout from the collapse of Silicon Valley Bank and problems with Credit Suisse – this could mean a last-minute tilt towards asset protection funds and trusts.

But before that, they have also strengthened their portfolios with passive trackers, as active funds have failed

We ask three of the largest platforms – AJ Bell, Fidelity and Interactive Investor – where investors have put their money so far this year.

Caution sees investors opting for passive assets

According to conventional wisdom, active managers navigate markets better than passive strategies they simply follow, but 2022 and 2023 have shown their limits.

Morningstar’s European Active/Passive Barometer 2023 reveals that only 29 percent of active equity managers outperformed their passive counterparts in 2022.

Vanguard funds continue to dominate the top choices among investors, making up seven of the 10 most popular funds among ii clients.

“Fund investors continue to shy away from actively managed strategies, with passive strategies, and Vanguard funds in particular, dominating the top picks for ii clients so far this year. In fact, Terry Smith’s Fundsmith Equity is the only active management flagship in the top 10,” said Kyle Caldwell, collectives specialist at Interactive Investor.

“During such a turbulent time for the markets last year, when active funds had a rough year and many failed to beat the index, it is no surprise that fund investors prefer passive over active.

“Time will tell if this continues, or starts to shift as we see more dynamism in the markets later in the year.”

A major appeal of passive funds is that they are simple and much cheaper than active funds.

Investors can rest easy knowing that they will be getting, broadly speaking, the returns of the index they have chosen to track. This means that while they will not outperform the benchmark, they are also unlikely to underperform.

In the face of rising interest rates and with the still uncertain outlook for the markets, passive trackers are seen as a less risky option.

Tracking funds from Fidelity and Legal & General are popular choices among Fidelity clients, although they are becoming increasingly cautious against the current backdrop.

Tom Stevenson, Investment Director Personal Investing at Fidelity says: “The Fidelity Cash Fund is the fund of choice for Sipp investors and is also in the top 10 of Isa. The Royal London Short Term Money Market Fund is also popular this year. X

“Cash is finally providing a viable alternative to riskier investments in stocks and bonds and for many investors the safety of cash is appealing even as returns remain negative in inflation-adjusted terms.”

Investment in the UK is in high demand

Elsewhere, British funds are particularly popular.

AJ Bell clients have chosen iShares Core FTSE 100 UCITS ETF given the index’s strong performance in 2023 compared to other global indices.

Similarly, the Vanguard FTSE UK Equity Income Index has been a popular choice for ii clients so far this year. The fund invests in the components of the FTSE UK Equity Income Index, which consists of stocks that are expected to pay dividends that are generally higher than average.

It has a current dividend yield of 4.9 percent.

Caldwell added, “As always, diversification is always key. For many investors, a mix of active and passive funds is a sensible approach.

‘One way to structure a portfolio is the core and satellite strategy.

“The core of the portfolio should be investments with few surprises – such as global or developed market funds – actively or passively managed.

“The satellite holdings are spicier – higher risk funds hoping to generate higher growth. Ultimately, there are no guarantees with any investment. It’s a long-term game and many of your choices as an investor will depend on your appetite for risk.”

Portfolio-determined Fundsmith Equity continues to be popular

Passive trackers may have become the go-to strategy this year, but despite a period of underperformance, investors still choose well-known names.

Fundsmith Equity, managed by Terry Smith, has long been one of the most popular mutual funds and has demonstrated consistent sustainability.

Across all three platforms, it remains in the top five funds chosen by investors despite a rough few months.

In 2022, the fund returned -13.8 percent, trailing the benchmark MSCI World Index, which posted a total loss of -7.8 percent.

The focus on “high quality” companies that can deliver high returns led the fund to a total return of 1.5 percent in February, outperforming the benchmark by 1.7 percentage points.

Alena Kosava, head of investment research at AJ Bell, says: “Quality companies owned by the likes of Fundsmith have seen valuation multiples increase over the years, but they shrunk dramatically through 2022.

“In an environment where global growth is slowing and there is a need for greater visibility and reliability in corporate earnings, quality stocks may not be a bad place to weather continued uncertainty and heightened volatility into 2023.”

“While it is incredibly difficult for investors to time markets, long-term exposure to global companies has paid off and it is important to keep that in mind, especially when markets are going through a rough patch.”

Scottish Mortgage is still popular

Scottish Mortgage has remained a fixture in many investors’ portfolios, topping the trust list of both AJ Bell and II.

The investment trust has long been popular among investors seeking exposure to growth sectors, but the technical defeat that characterized much of 2022 has led to a period of underperformance for the trust.

It has posted a total NAV return of -11.7 percent over the past year, behind the global AIC industry average of -2.8 percent. The share price also suffered, returning -23.5 percent, while the industry average returned a return of -6.9 percent.

Kosava added, “While we’re not out of the woods yet and growth stock valuations could fall further, investors may feel that much of the bad news has already been priced in.”

Investors are looking for income

There is good reason to consider adding dividend-paying investments to your portfolio to provide you with income and growth.

Mutual funds have been a good source of income for many investors – the “dividend heroes” list now includes 18 trusts, eight of which have raised dividends for at least 50 years.

City of London Investment Trust, managed by Job Curtis, has raised its dividends for 56 years in a row, meaning it remains a popular choice for investors looking for income.

> What is a dividend and how is it taxed? What you need to know

F&C Investment Trust is another trust that investors are flocking to despite a turbulent 2022 in which both share price and NAV lost ground.

In January, the trust’s NAV return was 4.3 percent and the shareholder return was 5.8 percent, compared to the FTSE All World Index’s return of 4.6 percent.

Like City of London, it is another dividend hero, having raised its dividend for 52 consecutive years.

Greencoat UK Wind is on the list of ii, largely because of its attractive yield of currently 5.6 per cent.

Caldwell added: “Another notable trust in the top 10 for 2023 so far is Merchants Trust, which also has a higher return than peers at 4.6 percent. It aims to provide above-average levels of income and income growth, as well as long-term capital growth, by investing primarily in higher-yielding large UK companies.’