Investors looking for a reasonable return on their investment will be driven to consider less conventional assets for inclusion in their ISA wrapper, warns Catalyst Investment Group.

With the Bank of England base rate standing at just 0.5 per cent, and concerns mounting over the current prospects for the equity and bond markets, investors seeking to use their ISA allowance to generate a steady income may find themselves unsure of where to turn.
 
Andrew Wilkins, executive director at Catalyst Investment Group, says, ‘There will be many savers out there who are urgently seeking a stable income via their tax-efficient ISA wrapper, having suffered heavy capital losses in recent market conditions.

‘For these risk-averse or more mature investors, income today will be far more important than waiting around for the market’s recovery. They simply cannot afford to wait for tomorrow’s long-term growth to be realised. Increasingly, we will see these investors start to look towards less conventional assets that provide a steady and reasonable rate of income.'

According to Wilkins, many income-generating investments are complex and not available to retail investors, but others are far less opaque and increasingly can be held within an ISA wrapper. In particular, funds backed by senior life settlements (traded life insurance policies) target net annualised returns of between eight and 12 per cent per annum, without any stock or bond market exposure.
 
Wilkins adds, ‘The alternatives facing income-seeking investors are stark. Returns on cash are stubbornly stuck in the doldrums and can only account for a maximum £3,600 of the ISA allowance. The returns from both equities and corporate bond funds are likely to change, and both are looking risky at this point in the cycle.

‘Corporate bond funds have been touted as a fairly stable alternative, but as we near the bottom of the interest rate cycle, prices will fall and bonds will begin to trade at a discount. Meanwhile, the long-term prospects for equities are good, but the risk of continuing volatility remains.'

He concludes, ‘If earnings come under pressure we will see more dividends slashed, following in the footsteps of L&G. In such difficult conditions, today’s income seekers may well see the advantage of locking up their cash in a good home such as senior life settlement (SLS)-backed funds, providing a degree of security in what remains a very testing market.’

Further reading:

Maximising your ISA allowance
Financial planning with ISAs
Spotlight on...corporate bond funds