Every year, investors have the opportunity to receive a tax-efficient income and tax-free growth from an individual savings account (ISA). Yet many do not maximise the opportunity of sustainable income and powerful growth that can be achieved from a variety of investment trusts in a stocks and shares ISA.
Tax benefits of Stocks and Shares ISAs
The ISA allowance for 2020/21 is £20,000 and the deadline to maximise your allowance is 5 April 2021. That means there’s still time to take advantage of this tax shelter this year. Stocks and shares ISAs can shelter assets from almost any recognised stock exchange, including equity markets, bond markets and even a range of multi-asset funds, which will include cash and property holdings. Investors can buy individual shares or they can choose to invest in funds or investment trusts.
Investment trusts are pooled funds which offer investors a way to diversify their holdings, particularly in global markets, and especially for those with relatively small sums to invest. These funds also frequently build their portfolios to withstand short and medium-term fluctuations in the market. That’s why they can offer income for the short term, as well as medium to long-term growth potential.
Investment considerations in 2021
While a balanced approach to investment is always advisable, optimism around equity markets for 2021 is strong. The markets weathered the worst effects of the pandemic and 2021, particularly in the second half, is slated for the start of the big recovery. With vaccination programs advancing around the world, we can look forward to economies that have been in varying stages of lockdown reopening.
At the same time, governments are continuing to seek funds through the bond markets to support economic growth. They are expanding into social bonds and green bonds and bringing new innovations and excitement to bond markets.
Even if the stock markets are to prove somewhat bumpy in 2021 as the pandemic continues, investment trusts have the unique ability to smooth out some of these bumps. They typically retain up to 15% of returns in good years to sustain dividend distributions to shareholders in bad years. That’s why some leading investment trusts have been able to keep raising dividends every year for decades.
J.P. Morgan’s leading investment trusts
The JPMorgan Claverhouse Investment Trust (stock market ticker: JCH), for example, invests in ‘blue chip’ or large and long-established British businesses, such as the energy giants, Royal Dutch Shell and BP; the Marmite-to-Magnum ice cream global food and drink business, Unilever, and pharmaceutical groups, such as GlaxoSmithKline and AstraZeneca, a particularly interesting stock this year.
This strategy has paid off, year after year. Despite market aftershocks from macroeconomic factors like the pandemic and Brexit, in January, Claverhouse announced that it was increasing its dividend by 1.7%. That’s the 48th year in a row that the trust has raised its dividend and the longest record of unbroken rises of any UK equity-focused trust.
For investors who prefer a balanced approach to risk, investment trusts like The Mercantile Investment Trust (MRC) offers the opportunity to invest in a UK portfolio of medium and smaller companies with dividents at least in line with UK inflation. MRC’s dividend income has risen by an annual average of 10% over the last five years. Its total returns were negative last year - they shrank by 5.1% - but were positive at 71% over five years and 199% over 10 years. It’s also an investment trust that knows how to weather a crisis, having launched in 1884 and survived both World Wars and the Great Depression.
Pursuing emerging markets
Perhaps the most enticing gains are to be found in investment trusts focused on emerging markets like Brazil, Russia, India and China. These volatile markets can offer higher returns, but, of course, only to the investor who is illing to accept higher risks. In this environment, professional fund management is particularly valuable, helping investors to navigate corporate governance and financial regulation.
The JPMorgan Emerging Markets Investment Trust (JMG) has a wide, global portfolio, including Chinese internet giants like Tencent and Alibaba, digital chip firm Taiwan Semiconductors and Latin American ecommerce firm MercadoLibre. An individual investor may hesitate to land on these firms as individual stock picks, but JMG delivered total returns of 39% over the last year, 193% over the last five years and 175% over the last decade. JMG yields only 1% dividend income but this has risen at an annual rate of nearly 19% over the last five years.
Emerging markets have suffered from the consequences of the global pandemic, particularly coming as it did on the heels of the US-China trade war. But there’s a new administration in the White House, the end of the pandemic is in sight and long-term investors still see reasons to feel positive about the right portfolio of emerging market stocks. JMG tilts towards low capital intensity, high-growth businesses that offer huge potential market, such as software and ecommerce firms.
It’s also a trust that has embedded ESG in its approach, due to the ethical considerations of our individual investors and our own responsibility to consider the consequences of our investments. But also, because it is so entirely consistent with a long-term approach to investment. A sustainable approach will deliver better results, reduce costs and translate into strong investment outcomes in the long term.
The clock is ticking
April 5th is fast approaching. If you haven’t yet considered investment trusts for your stock and shares ISA for this tax year, now is the time. And J.P. Morgan's range of investment trusts can offer the perfect vehicle, from blue-chip UK firms to the best of small and medium British enterprise, or a carefully curated portfolio of sustainable, innovative emerging market companies.