I’m a big fan of using a stocks and shares ISA as a simple way of investing in the stock market. This type of ISA is tax-efficient as you don’t have to pay income and capital gains tax. It’s also flexible and can be tailored to your appetite for risk. And you can have as little or as much control over your underlying investments as you wish.
As I’ve always had interest-only mortgages, I’m relying on my stocks and shares ISA to repay the capital element of my mortgage. So, I spent some time researching and exploring the different options before picking my stocks and shares ISA provider.
Read on to find out the number one thing I look for in a stocks and shares ISA and the big impact it could have on your ISA returns.
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What was the main reason I picked my ISA provider?
Initially, an independent financial adviser recommended I invest in a Schroders ISA as the repayment vehicle for my mortgage. But after a few years, I became frustrated by the 5% initial charge on each contribution and being able to invest only in Schroders funds. This prompted me to research alternative ISA providers that would allow me to manage my own investments.
My number one priority was to pick a stocks and shares ISA provider with a wide range of funds from a good selection of fund managers. I didn’t want to be tied to investing my ISA in one fund management company. After looking at the different ISA providers, I picked Hargreaves Lansdown as it offers over 3,800 funds from 177 different fund managers.
Why is my ISA invested mainly in funds?
Funds are an easy way of diversifying my portfolio to spread risk. Most of my funds are actively managed by fund managers, who pick a ‘bundle’ of shares to invest their funds in. Alternatively, I could invest in passive funds that track an index such as the S&P 500. Active funds tend to have a higher management charge (0.5-1.0%) than passive funds (0.1-0.2%).
I’m able to choose from a wide range of fund sectors too. There are different geographic regions, such as the UK, US, Asia Pacific and Emerging Markets. There are also different sectors, such as healthcare, technology and infrastructure. Funds provide me with a high level of flexibility for my portfolio.
That said, if you’re nervous about picking your own funds, you could choose one of Hargreaves Lansdown’s five ‘master portfolios’. They also publish a Wealth Shortlist of their selected 71 funds.
How can fund choice impact my ISA returns?
To illustrate the benefit of a wide fund choice, let’s have a look at the top-performing funds across different sectors, using data from Trustnet:
|
Fund |
5-year returns |
Sector (IA) |
|
Baillie Gifford Positive Change |
190% |
Global |
|
Baillie Gifford American |
169% |
North America |
|
Baillie Gifford Pacific |
126% |
Asia Pacific |
|
Slater Recovery |
114% |
UK All Companies |
|
Premier Miton European Opportunities |
103% |
Europe |
|
BlackRock GF World Mining |
102% |
Commodity/Natural Resources |
|
Liontrust Global Alpha |
94% |
Flexible Investment |
|
Equitile Resistance |
88% |
Unclassified |
|
Aubrey Global Emerging Markets Opps. |
68% |
Global Emerging Markets |
|
Courtiers UK Equity Income |
48% |
UK Equity Income |
Hargreaves Lansdown offers funds from seven of the eight different fund managers on this list. And I could have invested in seven of these top-10 performing funds in my ISA.
Looking at the Global Sector in more detail, the lowest fund in the top quartile (the top-performing 25% of funds), achieved a 5-year return of 59%. That’s more than 130% lower than the highest-performing fund, Baillie Gifford Positive Change.
What’s more, only 10 of the 431 global funds delivered a 5-year return of over 100%. This shows how a good choice of funds can make a big difference to your ISA returns.
What else did I look for from my ISA provider?
As my ISA is principally invested in funds, Hargreaves Lansdown’s stocks and shares ISA offered other advantages too:
- No dealing fees for buying and selling funds.
- No initial fee on most funds – funds can charge an initial fee (of up to 5.5%) when you invest, making a big dent in your initial returns.
- Discounts on the funds’ annual management charges.
- A user-friendly app and website for dealing and monitoring investments.
Hargreaves Lansdown is not one of the cheapest providers, with its annual fee starting at 0.45% of the ISA value. However, the potential to make better returns from investing in its wide choice of funds makes its ISA a good option for me.
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Take away
As stocks and shares ISAs are a long-term investment vehicle, it’s worth choosing your ISA provider carefully. Our experts have produced a detailed guide to our top-rated ISA providers for different types of investors.
We’ve also written a detailed review of the Hargreaves Lansdown Stocks and Shares ISA if you’d like to find out more about it.
