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Every week, Kyle Caldwell and guests take a look at how the biggest stories and emerging trends could affect your investments, with practical tips and ideas to help you navigate your way through. Join the conversation, tell us what you want us to talk about or send us a question to OTM@ii.co.uk. Visit www.ii.co.uk for more investment insight and ideas.
Hello, and welcome to On The Money, a weekly show that aims to help you make the most out of your savings and investments. With just a couple of weeks until tax year end, this week's episode and next week's are both gonna have an ISA focus. This week, we're gonna be looking at the most popular ISA funds with investors, and we're also gonna look back at what were the most popular ISA funds five years ago. Joining me to discuss this topic is Dave Baxter, who is senior funds content specialist at Interactive Investor. Dave, welcome back to the podcast.
Dave Baxter:Thanks for having me on.
Kyle Caldwell:So, Dave, let's firstly look back at what were the most popular ISA funds with investors five years ago. So the time periods we examined was the 01/01/2021 to the 02/28/2021. For those that are watching the podcast on YouTube, we'll be showing a table of the top 10 overall funds, investment trusts, and ETFs. So, Dave, as as you can see on the table, six of the 10 are Bailey Gifford Yeah. Managed funds or investment trusts.
Kyle Caldwell:If we cast our minds back to five years ago, this was before the interest rate rises started to kick in. And at the time, growth focused strategies were the flavor of the month, and that's evidenced by the fact that we had so much demand for Bailey Gifford funds or investment trusts at that time.
Dave Baxter:Yeah. You have to cast back a bit further, don't you, to, you know, imagine the kind of the lockdown period 2020. You're set at home a lot, and you you had a lot of these kind of trends targeted by funds like Scottish Mortgage suddenly got this massive boost. And then in 2020, you saw, I think Scottish Mortgage, I think Edinburgh Worldwide, and Pacific Horizon, they made returns of more than a 100%. So then you're moving into 2021, and, you know, people have have clearly seen these big gains, the kind of potential of those themes, and they want to get involved.
Kyle Caldwell:And it shows that at this particular point in time, investors did have a strong preference for growth focused Yeah. Strategies. And as we're gonna talk about in the podcast, it's important to diversify in terms of investment style. And at that point in time five years ago, you may have had too much in growth focused strategies. And then if you did buy at that point, then you're probably gonna be quite disappointed with the returns you've received within the next five years.
Dave Baxter:Yeah. I mean, if you look to, say, a five year performance chart for these 10 funds, you know, some of them have kind of struggled over that period, like China ones in particular. But turning to your growth points, of course, in late twenty twenty one, we you know, with inflation sticking around, we saw interest rates rising, and a lot of those funds at least temporarily kind of hit the buffers. So if you purely been sort of, like, piling into those funds at that given point in early twenty twenty one, you would have had quite a a difficult period.
Kyle Caldwell:What I also find interesting about the top ten five years ago is that we don't have any global index funds or global ETFs Yeah. Or US index funds or US ETFs. And we have seen very strong demand for those types of products over the past couple of years. But five years ago, people weren't heavily buying into them. In fact, there's just one ETF in the list, which is the iShares Global Clean Energy ETF.
Kyle Caldwell:And this is an example of potentially the dangers of performance chasing. As at the time, this ETF had really strong levels of performance. We now know with the benefit of hindsight that that those those level of retains, they did not last forever. They did not continue. And I think it does show the if you if you're investing in a particular theme or sector or even country, particularly if it's China or India, an emerging market country, that it's really important to consider it as a satellite holding and not a core holding and to diversify accordingly.
Dave Baxter:Yeah. I think diversify. Maybe also, you know, use kind of regular investing if you can so you lessen that risk of just kind of buying in at the, you know, highest point for valuations. You're kind of evening things out. And you do yeah.
Dave Baxter:I think you do need to be a bit kind of cautious and have a bit of a strong stomach when it comes to those more kind of niche holdings. Yeah. The the clean energy ETF is definitely a bit of a, perhaps, a bit of a warning case for people looking at those domestic funds.
Kyle Caldwell:But also at the same time, I think there's nothing wrong with trying to exploit a short term theme and to add a bit of spice into your portfolio. I think you just need to take a step back and think, if I buy into this theme now, what are its prospects going forward rather than looking back and looking at those previous returns and thinking, oh, those previous returns are excellent. Because at the end of the day, if you've not participated in that rally and you're only just buying now, you've not received those returns. They've gone to other investors.
Dave Baxter:Yeah. I always think I mean, I'm I'm a bit skeptical personally about thematic funds, and some people disagree with me. But I always think this is a particular risk with those funds because you tend to get a lot of hype drummed up around a certain theme. So it comes into your kind of awareness just as the that hype is very high and potentially those prices are very high. So maybe you just need to be a little bit wary of that and, you know, perhaps be dedicated and hold for the very long term or, as I said, do some other things like kind of regular investing.
Kyle Caldwell:And a final point before we move on to the most popular ISA funds right now is that, obviously, we've looked back five years ago at particular point in time. Many of those funds in the top 10, we had customers buy previously. They were you know, they didn't just buy at that one point in time. They've been buying for quite a while. So it wasn't as if they just bought at that one moment in time, and then five years later, the near some losses in some of those cases.
Dave Baxter:Yeah. Yeah. That's true. I guess because these are more the investments, I suppose, the more ad hoc investments and things you do beyond your usual plans. But I suppose it is interesting to consider how things might have panned out if you've been more of a contrarian with those picks because as as we've mentioned, a lot of these were funds that were doing well at the time.
Dave Baxter:Perhaps if you'd been buying in things like kind of bombed out UK equity funds instead, you might have seen, you know, much better kind of outcome for that portion of your portfolio.
Kyle Caldwell:Let's now move on to the most popular iso funds at the moment. So, again, for those that are watching the podcast on YouTube, we'll now be showing a table of the top 10. We've looked up from the start of this year, so January 1 up until the February 28. Within the top 10, the top two are to exchange traded commodity products. They're the iShares physical silver and the iShares physical gold.
Kyle Caldwell:So we've seen demands for both silver and gold pick up over around the past nine months, and that has been in response to really strong show in in terms of the spot prices of both of those commodities. But, again, I think it's important to treat this type of holding as a satellite holding as part of your portfolio given that they are more adventurous areas.
Dave Baxter:Yeah. I mean, we've seen a little bit of evidence of the kind of risks on show when you have these high valuations because, you know, if you I guess, it seems like a lot has happened in the last few weeks, but a few weeks back, you had kind of new Federal Reserve Chair nominators, and that kind of spooked precious metals investors. You saw some big falls. And then interestingly, within, you know, I suppose, the first fortnight since the escalation of hostilities in The Middle East, gold originally kind of strengthened, and then it fell back partly, you know, with the theory that people are kind of taking profits and covering margin calls elsewhere. But it is in the context of how much momentum's been behind the price in the last two years, it has become, yeah, like you say, more of a kind of punchy position, something maybe to keep in a smaller allocation within your portfolio.
Kyle Caldwell:Within the table, there are only three actively managed funds. So they are Artemis Global Income. So this fund is typically popular with our customers, but we've seen a real uptick in popularity for it over the past six months, I'd say. And I think that's on the back of how strong its returns have been, particularly over the past one and three years. It invests very differently from the wider market.
Kyle Caldwell:It only has 30% in The US. It has a good chunk of exposure to emerging markets around a third. It also has around a third of its assets to Europe and only a little bit in The UK. So for me, I think one of the reasons why investors are are looking at this fund is because it's offering something very different from the wider stock market. If you're buying a global tracker fund, for example, that's gonna have around 70% in The US.
Kyle Caldwell:So you're getting pretty you're getting very different exposure via this funds, whereas there are some global funds and global ex income funds that still do have pretty high weight into The US.
Dave Baxter:Do you think, though, investors need to be aware of what we were saying earlier about kind of style and kind of piling in too much. Because I suppose this is, you know, a classic kind of value fund. Value had a massive resurgence last year. We saw this fund and names like Brammore Global Equity having, you know, almost sort of perfect conditions. But I don't know.
Dave Baxter:Is there a risk maybe of people leaning now too far this way and kind of forgetting those growthier names that will complement them?
Kyle Caldwell:I think it's a case of if I was looking at the phone today, I'm thinking, oh, wow. That performance is pretty impressive. Well, not pretty. It's very impressive over one, three, and five years. And indeed, if you look back at the whole history of the fund since it launched, it was 2010.
Kyle Caldwell:It's produced very good returns, and I think this is a real good example of active management's adding value over the long term. But I think you need to look at the context of your overall portfolio. And as you've as you've mentioned, Dave, it has a value investment style. So it's hunting for companies that are cheaper than the wider market. It's trying to find those companies that over time, they're on low valuations, and those low valuations may rerate and that benefit the share price over time.
Kyle Caldwell:So I'd I'd look at it in the context of, have I already got too much exposure to value focused funds and investment trusts? And thinking about, okay, at the moment, there's certain growth strategies that have been out of favor. You may wanna look at those a bit more now than than Yeah. Than perhaps a couple of years ago when they were performing very well.
Dave Baxter:I suppose it's interesting to look at how some of the investments in those funds are done because, you know, we were looking at Artemis Global Income the other day, and I think it's top holding recently with Samsung Electronics, which is, you know, returns something like 200% over a year. And then, say, you look at classic quality funds, good example is Nick Trains funds, and obviously, a lot of his holdings are actually down. So you're getting this weird kind of muddying of the waters in terms of what's value and what's growth slash quality.
Kyle Caldwell:Yeah. I think some of the more growth but some of more classic growth stocks are now becoming today's value companies. Yeah. And I think that's a trend that's gonna continue in the months ahead. And, yeah, I think the the lines between what is a growth strategy and what's a value strategy will become increasingly blurred.
Kyle Caldwell:Yeah. In terms of the other actively managed funds in the top 10, we have the Royal London short term money market funds. We've seen over the past couple of years demands pick up very strongly for money market funds. So for those not familiar, these are funds that own a diversified basket of very low risk risk bonds that are due to mature soon. They typically have lifespans of a couple of months.
Kyle Caldwell:And money market funds are very low risk, and the yields, which is the amount of income produced by the funds, is typically in line with what the Bank of England's base rate is. So at the moment, money market funds, they're typically yielding around 3.75%, which at at the moment, it's giving you inflation beating income.
Dave Baxter:Yeah. And it it'll be interesting to see what the outlook for that is in future. So I guess today, you know, we're we're recording March 13, and, of course, we don't know what's gonna happen in the coming weeks with Iran. But one of the potential takeaways of the, you know, possible fresh energy shock is that inflation's higher and rates interest rates will either remain are likely to remain static or less likely to fall, perhaps we could didn't see increases. And I suppose if that happens, then the the returns from that fund will be more attractive.
Kyle Caldwell:I completely agree as I think a couple of months ago, the expectations were that UK interest rates are gonna be cut once, maybe twice this year. But as you just mentioned, obviously, due to conflict in The Middle East, I think the narrative has switched that and I think it's more likely that interest rates can be paused for at least the time being. However, prior to that, I think there was a there was thinking that if you were looking at money market funds, there may come a point in time when, you know, if if interest rates are cut a couple of times and therefore the yields on money market funds become less generous, then investors might have to take a bit more risk in order to receive a higher yields. And there are certain bond funds that are a bit riskier than a money market funds, but the trade off is that you're gonna get a bit of a higher yield. So just to name two examples.
Kyle Caldwell:So one of them is called the LNG short dated sterling corporate bond index funds. So this focuses on very high quality bonds. They're called investment grade bonds, and it focuses on bonds that are maturing in less than five years time. And it's the distribution yield on that fund is 4.7%. So that's, you know, a percentage point higher than most money market funds at the moment.
Kyle Caldwell:Another option is iShares Sterling ultra short bond ETF that also has a higher yields than a typical money market funds. Its distribution yield is 4.6%. That's based on the twelve month trailing yields. That's based on the distributions that vested me to be made over the past twelve months. So I will keep that in mind in terms of how that yield figure's calculated.
Kyle Caldwell:But, again, it it is offering a higher yield than a money market fund, and that particular ETF that focuses on bonds that maturing within the next year. In terms of the other actively managed funds in the top 10, that's Greencoat UK wins. This is an example of investors trying to bargain hunt. So it has a dividend yield of around 10%. It's on a very deep discount, which I think is around 30% last time I checked a couple of days ago.
Kyle Caldwell:However, it's total return performance, particularly over three years, has been a pretty heavy loss. So investors buying in today are hoping for a turnaround in fortunes for that sector, and they're hoping that that 10% dividend yields, if it is pays. And I think, you know, I think investors may have confidence that's gonna be paid because it it Jordan, the life of Greencoat UK wins, it has increased its dividends every single year since it launched around fifteen years ago. Yeah. It's recently changed it's recently previously, it was increasing its dividends in line with RPI inflation.
Kyle Caldwell:It's now changed to the lower CPI inflation rate. However, that is still an inflation beaten return.
Dave Baxter:And that's because the government switched the renewable subsidies from RPI to CPI, isn't it? So it kind of makes sense.
Kyle Caldwell:Yeah. So it means that it can't produce the same level of income as it was previously due to that. It was a curveball by the government to introduce that change.
Dave Baxter:I think also, Greencoat, I might be wrong, but I think it stands out because it's the only one or one of the only ones that still, you know, tries to increase your dividend with inflation from that sector. And also, people seem to view it as kind of a sturdier option on the income front, whereas I suppose with those renewables trust people have had concerns about whether these really high yields are sustainable. And in the last few days, we did see one of those fears, you know, become reality with NextEra Energy Solar is doing a strategic reset. And as part of that, it's sort of trying to get on a firmer footing, but that means in the short term, it's basically roughly half this dividend.
Kyle Caldwell:Let's now move on to the rest of the table. So there are a couple of well, there's a global ETF, the Vanguard's FTSEO World ETF, and there's also The US tracker, the Vanguard s and p five hundred ETF. Both of those have been popular over the past couple of years, and I think they are where the contenders to be a core holding in a portfolio that you can then have other holdings alongside that are more satellite positions, particularly the the global ETF because that's giving you exposure to lots of different countries, companies, industries, and sectors. You need to be a bit mindful that it has a large chunk of its its exposure in The US. But I think if you're holding this global if you hold many global ETF over the long term, I do think it's a holding that you can tuck away with confidence.
Dave Baxter:Yeah. I mean, you might be exposed to yeah. So we do have a big pullback in the in The US and so on. But, yeah, over the long run, it should rebalance, and it should kind of just reflect whatever the most kind of favored valuable companies are around the world.
Kyle Caldwell:There's also in the top 10, there's a leveraged ETF that aims to profit from the Nasdaq index. It it it aims to profit from, say, if the Nasdaq index rises 1%, it aims to triple the return of that index. However, I would be very wary of this type of ETF. I think I think it's I think they're very speculative, and I think there's a danger that if you own it for more than make more than a week or so, that you could actually get banned in this sort of ETF.
Dave Baxter:Yeah. Because I guess if you're tripling your moves, that also triples your loss if it's if it is a loss.
Kyle Caldwell:Exactly. So it's I I'd be more wary about the potential downside risk rather than the potential rewards for those types of products. So, Dave, you mentioned earlier that, you know, if you just follow the crowds, there is a risk that you may miss out on some contrarian investments opportunities. So when you're looking at the top 10 today, the top 10 ISO funds, what areas you think people are not not looking at the moments?
Dave Baxter:Yeah. What interests me is there are a few things. You know, lots of markets have been performing well in recent years, and a few markets that were quite unpopular have returned to life, And investors haven't always kind of jumped onto these areas. One is kind of one is UK funds. So we do sometimes see names like City of London and Temple Bar, so UK income funds, come into the list.
Dave Baxter:They're not currently in that list, but you could see people, yeah, kind of getting more UK exposure and enjoying that kind of rally that we've seen in recent years. I suppose slightly more left field is you know, markets like Japan have been doing incredibly well in recent years. I mean, as you mentioned before, past performance, of course, doesn't mean that's gonna continue, but it fascinates me that some of these more kind of satellite markets have been doing really well for a really long time and do seem to still have a positive narrative behind them. Say in Japan, have, you know, corporate governance reforms that have been making companies behave more shareholder friendly ways. So maybe investors are kind of missing out on some of these areas.
Dave Baxter:And, also, if they're not investing in them that much, then they're also missing out on diversification.
Kyle Caldwell:Completely agree. I mean, I think one area that is being overlooked at the moment is smaller companies. Yeah. Not just for The UK, but, I mean, I think there's, you know, some funds that offer exposure to European smaller companies, US smaller companies. There are there's not that many, but there are some global smaller company funds and investment trust options as well.
Kyle Caldwell:And I think some of The UK smaller company funds have performed very well on a one year view, but I don't see an awful lot of interest from retail investors. And I think that's reflected by the fact that the discounts on UK smaller company investment trusts are pretty much where they've been for the past couple of years at pretty wide levels. And just to give an example or two, so I was looking before we started the podcast and the River American tile UK micro cap investment trust, that's up 40% over Wow. One year. Yeah.
Kyle Caldwell:It's sitting on a a discount of 10%. You might not want to go as niche as a micro cap strategy. And I think if that's the case, then you can look at things like Fidelity special values or Lowlands. So they both invest across the whole of The UK markets. They've got exposure to both large caps, mid caps, and small caps, but they both do tend to have a particular bias to UK smaller companies.
Kyle Caldwell:Mhmm.
Dave Baxter:Yeah. I mean, I suppose it's just it takes us back to our well rehearsed points about the fact that it's it's good to have some of these niche areas, and it's generally good to look at your overall exposure in your portfolio. So be careful about kind of overlap. You know, we've talked before about things like US funds and global funds and so on. And do just try and get a good mix of things because some points, some will be up, some will be down, and hopefully that can kind of offset everything within your portfolio.
Kyle Caldwell:I completely agree. I think always take a step back, look at your own portfolio. If you consider a new investment, it's really important to think, what will this add to my portfolio? What will this give me? Will it give me something sufficiently different compared to the funds or investments for ETFs that I already own?
Kyle Caldwell:Dave, thanks for your time today.
Dave Baxter:Thanks for having me.
Kyle Caldwell:And thank you for listening to the latest episode of On The Money. Hope you've enjoyed it. We love to hear from listeners and get in touch by emailing otm@ii.co.uk. And I'll hopefully see you again next week.