Where will the money be invested this ISA season?

As we head into ISA season, I always think it is interesting to see what our investors are buying. The last couple of years have seen a slight swing away from bonds to equities, but in general, the trend has been pretty similar: UK Equity Income funds have been the most popular, followed by UK All Companies and Strategic Bond, then Asia Pacific ex Japan and Global equity funds making up the top five selling sectors.

When it comes to individual funds there has also been little change at the top: Invesco Perpetual High Income and Invesco Perpetual Monthly Income Plus have dominated as the search for income continues. Asian equities in the form of Newton Asian Income and First State Asia Pacific Leaders have been popular both years, as have M&G Global Dividend and M&G Recovery.

The changes that have occurred is that bond funds have fallen out of the top ten to be replaced by more UK equity and equity income funds as fears over an end to quantitative easing and rising interest rates have put people off buying more fixed income.

This year, however, judging by trends coming through in the past three months, I think things could be different. UK equities may well retain their top spot, but smaller companies funds and those that have a bias towards small and mid-caps seem to be the preference – both for growth and for income. With Neil Woodford leaving Invesco, other UK equity income funds are moving up the tables; Artemis Income, Threadneedle UK Equity Alpha and Rathbone Income seem to be the main beneficiaries.

A survey we carried out amongst our clients in October* also indicated that emerging market and Asian equities are really out of favour, with just 4% saying they could consider these areas for their next ISA investment. Couple this with the fact that the main two emerging market franchises of Aberdeen and First State have now closed their funds to new business, and it is perhaps unsurprising that not a single fund in this area is in the top ten over the past quarter.

Property is likely to be an asset class that will benefit from renewed interest this ISA season. It offers an alternative stream of income, with relatively low volatility, and the outlook for growth has picked up significantly in recent months as the economic recovery gathers pace. Indeed the Henderson UK Property fund is currently one of the top ten best sellers.

The real turn up for the books, however, is European equities. According to the Investment Management Association, this sector has been the worst selling sector for six of the past ten years. But amongst our ISA investors it is currently the fifth best selling. Those European companies that have so far survived the European sovereign debt crisis, should be in a reasonably strong position, and this new trend possibly reflects that fact with investors more confident in their prospects.

It will be interesting to see if these trends continue in the coming weeks.

Best selling ISA sectors:

Best selling ISA funds: 

All ISA data refers to Chelsea's client base.

* Survey carried out amongst 300 DIY investors during October and November 2013

By Sam Holder, operations director, Chelsea