How to use your British ISA allowance – whether you want international or UK exposure

John Moore, senior investment manager at wealth manager RBC Brewin Dolphin

A lot has already been made of the British ISA, well before we have seen the full details. Whatever it entails, the new wrapper will provide investors with an opportunity to shield another £5,000 per year from tax.

Personal Equity Plans (PEPs), which were introduced in the 1980s and designed to encourage people in the UK to invest in British companies, faced a lot of criticism when they first came out. But if you were able to commit, they were very much worth it. When the government shares more details, the best thing you can do is speak to a professional adviser about how this new allowance could fit into your long-term financial objectives.

If we take the British ISA at face value and assume it is an opportunity to shield investments in any UK-listed companies from tax, then there are a couple of options available to investors: using some of the UK’s multinational businesses to gain further exposure to the global market or getting behind what British ISAs are intended to do and invest in domestically-oriented companies.

Option one – Internationally-focused UK companies

If you’re less sure about the UK’s prospects, you can still gain exposure to the global economy through companies listed on the large-cap FTSE 100 index. Estimates put the share of revenues that come from overseas for all of these businesses at around 75%, with the remainder derived from within the country.

There are some world-class companies in their respective sectors listed in the UK, which offer a blend of capital growth and income potential – both of which enable compound returns over time that would be free of tax within the ISA wrapper:

RELX – RELX is a multinational business information and analytics company, which owns some of the top publications in each of its target segments and occupies a market-leading position in many of its areas of expertise¹. It also has an exhibitions division that produces some of the best-known events in a range of sectors. RELX has grown significantly in recent years to become one of the FTSE 100’s largest companies and still offers a dividend of around 1.7%² for income-minded investors.

Diageo – Diageo is the group behind many of the world’s best-known names in alcohol and spirits, including Guinness, Tanqueray, and Johnnie Walker, selling more than 200 brands in over 180 countries³. While the company has been hit by tough trading conditions in Latin America and some of its other markets, there were signs in its last results that pointed towards a more positive medium to long term. Diageo remains very strong and well-positioned to benefit from trends in the drinks and spirits industry, with ample room for growth in a highly fragmented market.

Croda International – Chemicals company Croda has seen its share price fall significantly from its peak in late 2021 on the back of a rare profits warning. Around 96% of the group’s sales are outside of the UK, along with 80% of its production⁴, making it more or less a pure international play. The shares may be down on their luck, but this presents a potential buying opportunity for patient investors, and there is a reasonable dividend of around 2.3% for investors in the interim⁵.

Experian – Experian provides credit scores to businesses and individuals in a range of markets, with most of its revenues derived from outside of the UK. Whatever conditions are like in the economy, businesses want to understand the risk of lending to other organizations or to consumers, providing Experian with a degree of resilience.

Option two – Back a UK recovery

The alternative is to get behind the spirit of British ISAs and use the allowance to invest in more UK companies. A lot has already been made of the differential between historical returns from the UK market and the global indices – however, as Japan has shown recently, there is something to be said for sticking with some underperforming countries and being patient.

With a few exceptions, the best way to play the UK is through collective investment vehicles such as open-ended funds or investment trusts. These provide you with access to a basket of UK companies, which can help to spread risk and provide exposure to a range of different sectors:

Liontrust Special Situations – Liontrust Special Situations provides exposure to some of the UK’s largest companies at a reasonable price. The likes of BP and Shell are in the fund, alongside some mid-cap names too, with a bias towards growth opportunities that remain unrecognized by the market. The fund has suffered outflows recently on the back of relatively tepid performance but offers a 1.81% dividend yield for those willing to stick with it⁶.

Fidelity Special Situations – Fidelity Special Situations provides access to value and recovery plays, along with some overseas holdings for diversification. Compared to the Liontrust fund, it takes a more value-oriented investment approach, preferring businesses that are out of favour and where change can deliver good shareholder outcomes. Top holdings include the likes of Swiss pharma group Roche, the insurer Aviva, and the outsourcing group Mitie.

Blackrock Throgmorton – Blackrock Throgmorton provides access to growth companies that could be tomorrow’s stars. Construction group Breedon, WH Smith, and pollster YouGov are among the top holdings. Despite its growth focus, the trust offers a dividend yield of around 2.5% and the shares trade at a wider discount than they have averaged over the past 12 months⁷, which may be a potential buying opportunity.

Mercantile Investment Trust – Mercantile is focused on small and mid-cap UK companies. Housebuilder Bellway, Warhammer maker Games Workshop, and furniture retailer Dunelm are among the top holdings. The trust provides a dividend yield of more than 3%⁸, but also has the potential for capital growth over the long term.

Legal & General – Although it is an individual company, Legal & General instinctively feels like a key play. The UK-listed insurance group should be a conduit for savers and has a role to play in getting pension funds to up their UK weighting. Legal & General is one of the UK’s leading mass-market savings firms, and it will be responding to the UK allocation challenge amongst its existing and potential pension clients and has been developing long-term asset investment for some time. The above-average yield of 8.1%⁹ will also appeal to many within the tax-free environment of an ISA.

Disclaimers

The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance.

RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office: 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876. VAT number: GB 690 8994 69.

– ENDS –

John Moore and his fellow investment managers at RBC Brewin Dolphin put together bespoke investment portfolios for clients based on their long-term objectives and their attitude to risk. The portfolios will have a mixture of hand-picked holdings in them including third party funds and individual stocks that are researched and recommended by RBC Brewin Dolphin’s in-house research team.

PRESS INFORMATION

For further information, please contact:

Peter McFarlane peter.mcfarlane@framecreates.co.uk / 07412 739 093

Richard Janes richard.janes@brewin.co.uk / Tel: +44 (0) 20 3201 3343

NOTES TO EDITORS

About RBC Brewin Dolphin

RBC Brewin Dolphin is one of the UK and Ireland’s leading wealth managers and traces its origins back to 1762. With £51.8* billion in assets under management, we offer award-winning, personalised wealth management services from bespoke, discretionary investment management to retirement planning and tax-efficient investing.

Our qualified investment managers and financial planners are based in 33 offices across the UK, Jersey and Republic of Ireland. They are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.

As part of Royal Bank of Canada (RBC), we are now able to draw on the strength of a global financial institution to continue to improve the service we provide to our clients and drive further innovation across our business.

*as at 31^st October 2023.

The value of investments, and any income from them, can fall and you may get back less than you invested.

RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office: 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876. VAT number: GB 690 8994 69.

About RBC

Royal Bank of Canada is a global financial institution with a purpose-driven, principles-led approach to delivering leading performance. Our success comes from the 94,000+ employees who leverage their imaginations and insights to bring our vision, values and strategy to life so we can help our clients thrive and communities prosper. As Canada’s biggest bank and one of the largest in the world, based on market capitalization, we have a diversified business model with a focus on innovation and providing exceptional experiences to our more than 17 million clients in Canada, the U.S. and 27 other countries. Learn more at rbc.com.

We are proud to support a broad range of community initiatives through donations, community investments and employee volunteer activities. See how at rbc.com/community-social-impact.