Are you a hare or a tortoise when it comes to investment? An audacious type, with the stomach for a bumpy ride, ready to explore with this year’s Isa allocation, or do you prefer a gentler life, free from sudden surprises? Either way, here are some investment ideas to consider this April.
If you’re a hare
With interest rates at a historic low and concerns about what rising rates will do to bond yields, the appeal of equities is stronger than ever. Don’t assume that the best returns will come from emerging markets, though. It is true that GDP growth rates in emerging markets will likely continue to outpace those in the developed world. However, plenty of companies listed in the developed world have solid global businesses that make them well placed to cash in on this growth.
Most importantly, good growth prospects in emerging markets say nothing about what will happen to equity values. “There is no meaningful relationship between GDP levels and local stock market returns,” says Jason Hollands, a managing director at Tilney Bestinvest.
In the past five years the significant emerging economies have outstripped the developed ones for growth, but emerging market equities have, by and large, underperformed compared with developed ones. A comparison between the MSCI World Index with the MSCI Emerging Markets Index shows that for three out of the past five years, developed market equities have outperformed emerging markets.
For developed market equity there is much to lure investors to the US. President Trump is promising corporate tax cuts and boosts in infrastructure spending. “These are policies that will push markets for a couple of years yet,” says Adam Laird, the head of exchange traded fund (ETF) strategy at Lyxor, the asset management company. He likes smaller companies, which will benefit from the policy changes, but should be protected from any downturn in international trade that might occur as a result of Trump’s protectionist policies. Mr Laird recommends Lyxor Russell 2000 UCITS ETF (annual charge 0.4 per cent), which covers the smallest listed companies in the US.
Brave investors shouldn’t rule out Europe, says Laith Khalaf, a senior analyst at Hargreaves Lansdown. The economic backdrop is poor, he notes, but valuations are low. “Europe is out of favour compared with other regions right now, which is a good signal to invest in a market,” he says. He recommends the Jupiter European Fund (annual charge 1.03 per cent).
If you do want to invest in emerging markets, it pays to be selective, says Mr Laird. These are distinctive economies driven by very different forces. He likes emerging Asia, where investors have traditionally been sceptical. Mr Hollands is also a fan of the region and of India in particular.
He recommends the JP Morgan Emerging Markets Investment Trust (annual charge 1 per cent).
If you’re a tortoise
Traditionally, cautious investors would look to bond funds, but the prospect of rising interest rates has made value hard to find. Short duration bonds should be less sensitive to interest rate changes. However, the asset class offers little capital value in a rising rate environment, says Rob Burgeman, a director in investment management at Brewin Dolphin. “Or, if they do, then the returns are so scarce that you might as well hold cash.”
An alternative to conventional bonds that provide protection against future interest rate rises are floating rate notes — secured loans whose interest payments vary with the prevailing interest rate. Like bonds, your capital will be secure and you should benefit from interest rate gains.
Mr Burgeman recommends the NB Global Floating Rate Income fund (annual charge 0.76 per cent), which focuses on companies in the US, where most of the floating rate note market is based, and the UK. The fund is well diversified; its biggest holding comprises less than 3 per cent of the total fund.
Another way to protect your capital in the event of increasing interest rates is through index-linked bonds, which increase their payouts as inflation goes up. The Lyxor FTSE Actuaries UK Gilts Inflation-Linked UCITS ETF (annual charge 0.07 per cent) invests in 28 bonds; income and capital increase with the UK’s retail prices index.
Even cautious investors shouldn’t ignore stocks entirely. “Ultimately, equities bring better returns and will give balance to a portfolio,” says Mr Laird. A longer-term investment horizon should make you less jumpy about stocks’ volatility. To make the ride less bumpy still, consider a minimum volatility smart beta strategy, which filters higher volatility companies out of the index they are based on. For a European fund consider the iShares Edge MSCI Europe Minimum Volatility UCITS ETF (annual charge 0.25 per cent).
Case study: ‘I discovered that I liked taking risks’
“I thought I was risk averse until I started buying stocks and shares. I found I liked taking risks,” says Jackie Lewis, who lives in Shropshire and runs Mango Holidays, a tour operator for single-parent families.
Now in her late sixties, Jackie began investing in a stocks and shares Isa in the 1990s. “The technology bubble burst and my portfolio took a nose dive,” she says. However, she started to enjoy picking stocks and has been investing ever since.
Jackie focuses on picking UK companies using research from Bestinvest and finance writers. She also has a stocks and shares Isa with Bestinvest, which is managed by a financial adviser who selects investments for her. “When a share price goes down, don’t assume it will rise. It is the hardest thing to sell your first share at a loss, but you get used to it.”