What have the ISA early birds been buying?

Income has been a clear theme in the early days of the new tax year, interactive investor data shows.

• Early birds snap up Fundsmith Equity after a return to form
• Early birds overlook Vanguard LifeStrategy compared to last year
• Scottish Mortgage Investment Trust moves down five places to seventh place
• City of London and JP Morgan Global Growth and Income investment trusts are two new constituents in first two weeks of the new tax year
• ii looks at early bird versus last-minute ISA investing

It’s not easy to utilise the full £20,000 ISA allowance, but a fortunate 3% of interactive investor customers were able to maximise the full ISA allowance in the first two weeks of the 2023-24 tax year.

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This is consistent with the first two weeks of the last tax year. However, there have been some interesting changes in terms of what those early birds are swooping in on. 

Income has been a clear theme in the early days of the new tax year, with City of London (LSE:CTY) and JPMorgan Global Growth & Income (LSE:JGGI) each in the top 10 in the first two weeks of the new tax year, having been absent during the same period last year.

They join the usual predominantly FTSE 100 blue-chips, with yield arguably a big driver for income hungry investors.

Scottish Mortgage (LSE:SMT) remains in the top 10, but is down five places to 7th position. 

Fundsmith Equity, on the other hand, is up three places compared to last year and was the third-most bought instrument among ISA early birds in the first two weeks of the tax year. This follows a return to form this year as high-profit margin companies deliver, with Terry Smith’s bet on luxury goods shares paying off, for now at least.

Meanwhile, early bird ISA investors turned their back on passives, after a year to date in which passive funds have dominated the best buys. Not a single Vanguard LifeStrategy fund, which were darlings of the last tax year, made it into the top 10 among ISA early birds in the first two weeks of the new 2023-24 tax year. 

Single stocks

Victoria Scholar, Head of Investment, interactive investor, says: “FTSE 100 large-caps such as GSK (LSE:GSK), Barclays (LSE:BARC), Lloyds Banking Group (LSE:LLOY), Legal & General Group (LSE:LGEN), Aviva (LSE:AV.), and Diageo (LSE:DGE) have proven to be popular among those who have maxed out their ISAs in the first two weeks of the year. 

“With financials such as Barclays, which is down 7% in 2023, underperforming the UK blue-chip index, opportunistic investors have pounced on the chance to swoop up stocks at discounted valuations. This unloved sector has fallen out of favour amid the recent banking turmoil with the collapse of SVB and the rescue deal for Credit Suisse. 

“Amid the backdrop of sluggish economic growth and rampant inflation, investors have been turning to more defensive plays such as GSK to weather the macroeconomic storms. Its recent slew of acquisitions, including Bellus Health and Sierra Oncology, could bolster its drugs pipeline with CEO Emma Walmsley commenting this week that the business had made a ‘strong start to 2023’. 

“Similarly alcohol sales tend to be relatively resilient during tough economic times, steering investors towards Diageo. Plus for income investors, Diageo is a noteworthy dividend stock having raised its payments for more than 15 consecutive years. The drinks giant upped its interim dividend in January and is returning cash to shareholders by adding £500 million to its existing share buyback programme. However a softening consumer stateside and cost inflation are headwinds that incoming CEO Debra Crew will have to contend with when she takes over from Sir Ivan Menezes, who has been at the helm for almost a decade.” 

Early bird catches the worm? 

While only the very fortunate few are able to utilise the full ISA allowance, the strategy does have merit over the longer term.

Alice Guy, Head of Pensions and Saving, interactive investor, says: “It’s not easy being an early bird – it needs plenty of liquid assets, and plenty of spare time too if you are doing the research yourself. 

“There are also pros and cos to the strategy: investing a lump sum in one go brings market timing risk in the shorter term. And there’s no question that those who want to sleep easier might prefer to drip feed their investments on a monthly basis. The great news is that ii offers free regular investing for funds, investment trusts and popular UK shares.

“But early bird investors can be less likely to get caught up in last-minute ‘emotional’ decision-making ISA rush. It also gives you an extra year in the market, and longer term, that’s powerful. 

“Although there only appears to be one day in it, if you start the clock on 6 April and one set of investors chooses the early bird route and invests £20,000 at the start of each tax year, they will end up with a portfolio worth £264,136 after 10 years assuming a 5% annual return after charges – not easily achieved. But if the scenario does play out, that is £12,578 more than those investors who choose to invest the same £20,000 at the end of each tax year, effectively only giving themselves nine years’ worth of growth, where their portfolio would have grown to £251,558.

“Over 20 years, the impact is even more stark, with the difference between early bird and last-minute investors resulting in a portfolio worth over £33,000 more by investing early - £694,385 compared to £661,319 if you were lucky enough to generate a 5% return after charges.”

interactive investor ISA early birds investing the full ISA allowance in the first two weeks of the 2022-23 tax year and first two weeks of the 2023-24 tax year