The Share ISA

What’s the key to a successful share ISA, timing or time?

Time. Choosing the investments that form the long term foundation of your maxi share ISA is the most crucial decision you will make. These investments, known as ‘Core Holdings’, are substantial outlays made early in an investment life for the specific purpose of being held for a prolonged duration. Poor investments at this stage will be difficult to recoup, and could turn a profitable ISA into an unnecessary and money haemorrhaging burden.

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How do I avoid the pitfalls of a potentially unsuccessful share ISA?

Choose your core holdings only after careful consideration and research. There are four possible avenues open to you when evaluating the core holdings that would work most successfully:

(1) Fund of Funds - Running a diverse cross section of assets within your shares portfolio is the best way to minimise risk. You don’t become reliant on one asset to do all the work, and if this asset performs poorly, then the rest act as a shield surrounding your investment. A fund of funds (FOF) is orchestrated by a FOF manager, who invests in other funds rather than injecting money directly into shares, thus utilising the expertise of many fund managers along the way.

For: A FOF allows you to hand over your asset allowance to an expert, which is great for those who are beginners at reading stocks.

Against: Control freaks need not apply. Additionally, FOFs don’t come cheap and effectively you pay twice, both for the underlying fund management and the actual fund manager himself/herself. The long term value is questionable.

(2) Trackers - The ethos behind the tracker is to maximise gains by minimising costs. Trackers exist to mirror the returns of a given index, the FTSE 100 for instance.

For: Fund managers plus costly teams of researchers are not necessary here; Tracker funds simply invest in all of the companies in a given index according to their market value weightings. The low demand on fund expertise make trackers the cheapest and least ‘hands on’ way to spread equity investments.

Against: Those seeking a high risk for higher gain investment should avoid the tracker. It’s a steady investor.

(3) Balanced Managed Funds - Similar in principle to FOFs, balanced managed funds represent a grab-bag of managed investments. The difference though, is a restricted maximum equity exposure of 85% in the fund, meaning that 15% of the fund is always held back and not invested.

For: The investment ceiling limits your falls but caps your returns, it’s a two way street.

Against: This fund would not suit an aggressive investor. Cautious managed funds exist also, where maximum equity exposure is set at 60%.

(4) Equity Income Funds - The hardy perennial of the ISA world, equity income funds never go out of fashion. Equity income fund managers buy shares in companies they think will return consistently high dividends, which over the last few years has included banks and building societies. Favour funds with clear, defined strategies that you can clearly understand.

For: Investors suggest that now might be a good time to get involved with equity income funds, with costs in the equity income sector at their lowest for a number of years.

Against: With the hits banks have taken during the latter half of last year, equity income funds took something of a pounding too.

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I’ve heard about Global Investment Trusts, how do they differ from ISAs?

Global investment trusts are companies whose shares are quoted on the stock market with the specific purpose of investing in portfolios of shares in other companies. Investors’ money is pooled, and then invested in a number of global companies in order to spread the risk.

For: Annual management charges are lower than ISA management charges at around 0.25% a year (FOF management charges weigh in at around the 2% a year mark). Global investment trusts can be bought into for as little as £25 a month and suit new or modest investors.

Against: Pooling money and spreading the risk can make for diminishing returns. Global investment trusts are structured in a complex manner and require considerable research and understanding before you enter into them.

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In summary

Share ISAs are for the long term, and the core holdings that you initially choose to underpin the ISA are the most important investments you’ll make.
Fund of funds utilises the expertise of many fund managers. Although not the most ‘hands on’ of strategies, it’s an ideal place for the ISA novice to start.
The tracker is a steady and fuss free investor.
Balance managed funds are ideal for those who don’t want to risk it all by always holding a percentage of the fund back.
Equity managed funds have fallen out of trend in recent years, but the depressed market is now ready to be taken advantage of again.
Global investment trusts are difficult to grasp but easy to invest in.

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Our recommendation

The Legal and General (www.legalandgeneral.com) Income ISA aims to provide investors with a regular income. You can aim for growth by reinvesting income earned, and the range of Income ISAs on offer are tailored to the level of risk you intend to take.

The JM Finn Global Opportunities fund (available through Hargreaves Lansdown) invests in global markets at every level of the supply chain. Most companies that this fund invests in are listed in the west, but have significant operations in emerging markets. Essentially, you get the best of both worlds.