ISA Investors Favour Income Funds

It has been one month since the ISA allowance was increased to £15,000 and investors were given greater flexibility to transfer their ISA savings between cash and shares

Emma Wall 31 July, 2014 | 10:15AM

It has been one month since the New ISA was introduced allowing investors to shield up to £15,000 a year from the tax man. The Chancellor upped the tax-free savings allowance in his ‘Budget for savers’ in March, and introduced greater flexibility for transferring accrued ISA savings between cash and stocks and shares.

According to fund platform Hargreaves Lansdown income funds have dominated the ISA charts, with investors favouring home-grown equities which pay a dividend.

It has also been a year since AIM shares were able to be held in an ISA wrapper. Trading in AIM stocks soared last summer, according to fund supermarket Alliance Trust, in the first month that AIM stocks were able to be held in ISA wrappers there was a 150% increase in AIM trading on the platform.

In the first month, mining and energy shares dominated the top AIM shares traded by ISA investors, and this pattern remains the same today.

Among fund investors new launch CF Woodford Equity Income was the top choice on the platform, but this may have been distorted thanks to a fee-deal the platform negotiated with the asset manager. Also featuring in the top ten were the Morningstar analyst Gold rated Artemis Income, Threadneedle UK Equity Income and Newton Global Higher Income.

Income investing as a strategy has become increasingly popular over the past five years as record low interest rates and Government schemes such as Funding for Lending have put downward pressure on cash rates. Dividend paying assets are also popular among long-term investors looking for growth as unit holders can opt for pay outs to be accumulated. This means dividends are ued to either physically buy more units in the same fund or increases the unit price by the same amount of that distribution.

“Investors tend to forget or overlook that income-oriented strategies can also be a source of capital growth”, says Michael Parsons, of JP Morgan. “Dividend-paying stocks benefit from the compounding effect that occurs over the life of the investment, which explains why dividend-paying stocks tend to outperform.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Artemis Income R Inc2.28 GBP0.26
BNY Mellon Global Income GBP Inc223.63 GBP-0.31
Threadneedle UK Eq Inc Rtl Inc GBP0.98 GBP0.37

About Author

Emma Wall  is former Senior International Editor for Morningstar

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