- Fund investors are going for global and US market exposure, cash alternatives and income
- Passive investments are growing in popularity, with no actively managed equity funds in top 10 funds list
- Investment trust investors are going for income and bargains
- Most popular shares for ISA investors this year include ones linked to bitcoin, big dividends and recovery candidates
“AJ Bell DIY investors have been busy filling their ISAs ahead of the tax year-end on 5 April,” says Dan Coatsworth, investment analyst at AJ Bell.
“ISAs are a great way to build up wealth and shelter your gains and income from the taxman.
“Exposure to global and US markets and generous dividend payers were key themes, as you might expect from ISA users. However, there were a few surprises including a shift in behaviour by investment trust fans, and stock investors were taking quite a few contrarian bets.”
FUNDS
“Among funds, there wasn’t a single actively managed portfolio of stocks and shares on the list of most popular ISA investments so far this year. Instead, investors opted for low-cost tracker funds or ETFs when it came to equity vehicles in the top 10 funds by net flows.
“UK investors are increasingly losing faith in the ability for fund managers to consistently outperform the market. By shunning active funds, investors are choosing the lower cost route of simply tracking the market. It’s easy to see why.
“Research by AJ Bell recently found that less than a third (31%) of actively managed funds have beaten a passive alternative over the past 10 years.
“The collapse of Woodford Asset Management in 2019, negatively affecting hundreds of thousands of people, together with a multi-year run of underperformance by so-called star fund managers Terry Smith and Nick Train, have given investors further reasons to be wary of active management. While there are still some bright managers delivering outperformance, it’s incredibly hard for them to succeed year in, year out.
“Outside of the equity space, there was only one actively managed fund in the top 10, being Royal London Short-Term Money Markets. With interest rates trending downwards on cash accounts, investors have been looking for cash alternatives that can be held in an investment ISA, and money markets funds have ballooned in popularity.”
INVESTMENT TRUSTS
“Income was the dominant theme among the most popular investment trusts with AJ Bell DIY investors filling their ISAs this year.
“Investors reliant on their portfolios to generate an income to help pay the bills are naturally drawn to high yield investments. The average dividend yield on the top 10 most popular trusts is 6.7%, nearly twice the 3.4% yield offered by the FTSE 100.
“Share price weakness in many parts of the investment trust space, particularly infrastructure and renewable energy, have resulted in very high yields, including 10% from The Renewables Infrastructure Group.
“Investors may view such trusts as bargains given many trade on large discounts to the value of their underlying portfolio. Large yields offer compensation for the shares being out of favour but there is still uncertainty in when or if those discounts will start to narrow.
“The minimal representation of growth-style investment trusts in the most popular list with AJ Bell DIY investors is a surprise. It suggests a sense of caution among investors, perhaps influenced by growth-style stocks going off the boil in recent months. It is telling that the tech-heavy Nasdaq index in the US is down 5.3% year-to-date whereas the ‘old economy’ FTSE 100 – dominated by financials, healthcare, oil producers and miners – is up 8.6%, both on a total return basis.
“Scottish Mortgage used to be the ISA investor’s investment trust of choice, offering a way of accessing tomorrow’s market leaders. Not only is it absent from this year’s most popular trusts among AJ Bell DIY investors, but it also ranks as the least popular based on net flows. That suggests many people don’t want to hold out for jam tomorrow, and would prefer something that generates jam today, even if the returns might be less.”
STOCKS AND SHARES
“The list of most popular stocks in AJ Bell ISAs so far this year is divided into three buckets – higher-risk investments linked to cryptocurrencies and AI, generous dividend payers such as retirement savings group Phoenix, and out of favour companies where investors are potentially buying in the hope of a rebound.
“Nvidia is the only member of the Magnificent Seven to make the list of most popular ISA stocks. It delivered stellar share price gains in 2023 and 2024 and investors might be hoping for a continuation of this trend, although that has not happened so far this year.
“Donald Trump’s teasing and then confirmation of a strategic reserve of cryptocurrencies in the US got people fired up about bitcoin. While investors cannot hold the crypto directly in an ISA, they can buy shares in MicroStrategy – now renamed as Strategy – and hold them in the tax wrapper. Strategy has become a proxy for the bitcoin price due to its approximate $23 billion investment in the asset, equal to more than a third of the company’s entire market value.
“Some investors view their SIPPs (self-invested personal pensions) as a home for higher quality or more stodgy investments while they use their ISA for higher risk picks. That might explain the presence of names such as EasyJet, JD Sports and Taylor Wimpey on the most popular ISA stocks list with AJ Bell customers, with their share prices either stuck in a rut or beaten up. Buying their shares now would require taking a view that something will happen to get them back on track – either a natural improvement in earnings, intervention by an activist investor or a takeover approach.”
