Jenny Lowe goes in search of a broader range of ISA investments than the standard equity or bond funds

‘Whereas Alistair Darling and his cronies at the HMRC are quick to hit you with stealth taxes, your annual ISA allowance is one tax-efficient gift the government does give you, and it should be an essential part of your investment portfolio,’ enthuses Andrew Barker, chief operating officer at Skipton Financial Services.

He adds, ‘Only around a third of the UK adult population currently hold an ISA, with many of these failing to top up the account on a yearly basis. Therefore, with the end of the current tax-year looming, we would urge people to take advantage of their full ISA allowance, or risk losing it forever and further lining the chancellor’s pockets with your hardearned money.’

Rebuilding confidence
Last year saw the FTSE 100 index plummet to 3840.6, its lowest level since its peak in June 2007, which has caused many investors to turn their attention to cash. However, as we are all too well aware, the returns on most cash deposits are derisory at the moment, and this could be the ideal opportunity for those wanting to make the most of their tax-free allowance to opt for something a little unusual in a bid to boost their returns.

Sheridan Admans, investment adviser at The Share Centre, explains,‘Considering where the markets are, a lot of people had their fingers burnt in most asset classes in late 2008 and will now be looking to rebuild their portfolios over the long term, focusing on areas were there is good scope for steady growth within a portfolio.’

And there are likely to be opportunities away from the standard equity market portfolios.With governments around the world implementing fiscal stimulus packages in an attempt to stabilise economies, many will be looking to sectors such as infrastructure and utilities that are set to benefit from long-term contracts.

Admans points to the First State Global Infrastructure fund, which focuses on toll roads, airports, ports, utilities and pipelines. He says, ‘What makes infrastructure quite interesting is the high quantity of governmentbased contracts, which are projects that could last five to ten years. This is very attractive in this type of environment, especially for regular savers that are drip-feeding their money into an ISA on a regular basis.’

Eco in the economy
As well as infrastructure, Admans is hopeful that some of the money being poured into the economy by the government will extend into the new technology space, enabling companies to develop things like renewable power generation or cleaner water systems.

‘Eco funds tend to be very popular in growth markets, usually because most of the companies involved are small and have technologies that need a lot of money thrown at them,’ he says.

The Allianz RCM Global EcoTrends Fund invests in companies with exposure to ‘ecosectors’ including the EcoEnergy, Pollution Control and Clean Water sectors.

Bozena Jankowska, manager of the fund, argues that ‘What is driving the environmental technology revolution is much more than climate change. It is also the fact that growing affluence and urbanisation in China and India – and much of the rest of the developing world – is creating significant stresses on the environment, and, of course, energy and commodity depletion.'

Cheap and accurate
However, including funds like this in your ISA can become rather expensive, with many fund houses levying at least a four per cent initial charge. But there is an investment vehicle that can offer access to unusual sectors that is much more cost effective.

The exchange-traded fund (ETF) is a cost-effective way of gaining exposure to a particular index or asset class. Barbara-Ann King, head of proposition at Barclays Stockbrokers, says, ‘Given the rise in global demand for ETFs since their launch seven years ago, it is evident that some investors in the retail space remain confused as to what they are. However, recent trends have shown that this investment vehicle is increasing its visibility in the world of retail and offers instant benefits to our clients.’

ETFs are similar to index funds in that they mirror the performance of various sector and stock market indices such as the Dow Jones Industrial Average, the FTSE 100 or the S&P 500.

Yet they also combine the characteristics of open-ended funds and shares. They are, like funds, baskets of bonds or shares. But they tend to act more like shares – ETFs are listed on major exchanges and traded like shares – and many investors are unaware that they can be held in an ISA.

As Daniel Freedman, director of provider SPA ETF, suggests, ‘Exchange-traded funds are the professional investor’s best-kept secret, and we are keen to make retail investors aware that they can place an ETF into an ISA, as they are ideally suited to their needs. ETFs are cheap, transparent and easy to use. The combination of instant diversification, low cost and the flexibility offered by ETFs will lead to the exchange-traded market evolving and more specialised products appearing in the market.’

Businesses and people looking to environmental technology to provide at least some of the solutions.’ Going ‘green’ with an ISA is becoming an increasingly popular way to invest tax-free savings and, according to recent research, the number willing to invest ethically jumped by 18 per cent during 2008.

The ethical option
When it comes to ethical, or socially responsible, investing (SRI), there are two main options: positive investment, which means that the fund invests in companies that are actively involved in socially or environmentally beneficial industries, such as renewable energy; and negative investment, which emphasises the avoidance of companies that are involved in industries that don’t meet such criteria, such as the arms trade or heavy polluters.

The F&C Stewardship Growth fund was the first ethical fund in the UK when it was launched in 1984 and now holds more than £600 million of investors’ money. The range of Stewardship funds, which includes growth, income and international versions, shuns arms, tobacco, gambling, alcohol, most oil companies and all pharmaceutical firms, because of animal testing.

This leaves about half the stocks in the FTSE All-Share index from which to choose. Having outperformed its benchmark during the bull phase up until mid 2008, the F&C Stewardship Growth fund has started to feel the pressure as the bear market sunk its teeth in, but as Sheridan Admans explains, this isn’t unusual: ‘Funds like this work better in a growth market, and we are certainly not in a growth market at the moment. But if you take a long-term view and build your money up in these types of funds, hopefully in two to three years’ time you will reap pretty reasonable rewards.’

Greater diversification
And Stephen Barber, head of research at stockbroking firm Selfrade, agrees.‘ETFs are well suited to ISA investors who can use their allowance to invest in funds with low fees, easy access and transparency.

This allows for diversified portfolios to be built, offering access to markets and sectors from across the world.’ And Manooj Mistry, head of ETF provider db x-trackers UK, suggests that ‘Hopefully, over the long term, the market is always going to be rising, but in the short term there will be fluctuations, as we have seen recently.We view the short ETFs as tactical investment tools that, when used in a self-select ISA, enable the combination of short products and long ETFs, actively managed funds or stockpicking.’

Mistry explains, ‘If you are generally bearish about the UK stock market, for example, you can put 50 per cent of your ISA into the FTSE 100 Short ETF, but then, if you think three or four companies are going to perform well, you can go long of those stocks.’

A helping hand
Adding spice to your ISA doesn’t have to involve risk. Charity Bank, formed in 2002, recently launched its Charity ISA, which pays three per cent AER and a fifth year bonus of 1.25 per cent for charity.

This is a cash ISA and is the only tax-free account where your deposit, and your interest (if you so decide), is used for a charitable purpose, so you can lend a helping hand without risking all your hard-earned cash.

Charity Bank’s CEO, Malcolm Hayday, says, ‘Some people may be wondering just what their bank has been doing with their money. Because Charity Bank is transparent about its lending, our depositors know that their money is working responsibly within communities throughout the UK. Disillusioned savers might want to consider moving their money to a bank whose ethos focuses on generating social, rather than just financial, profit.’