More than two thirds of ISA money is invested in open-ended funds, but their dominance has declined over the past decade, according to the latest data by Her Majesty’s Revenue and Customs (HMRC).
Currently, 69.6% of investments made through Stocks and Shares ISAs are held in open-ended portfolios, compared to 75.3% in 2011/2012.
ISA investors could only put money into open-ended funds run by the same fund group when they launched in 1999, but the framework has since expanded, making more options available.
Laith Khalaf, head of investment analysis at AJ Bell, suggested that this could be the reason for the 5.7 percentage point decline over the decade.
He said: “It’s clear that open-ended funds still retain their popularity with ISA investors, albeit not to quite the same extent as 10 years ago. But that is probably more to do with greater choice and information being available than a sign of disillusionment with open-ended funds per se.”
Instead, trusts have become a more popular choice among investors with the amount of ISA money held in closed-ended vehicles increasing 70% over the past decade.
Despite this leap in popularity, investment trusts account for a relatively small portion of all ISA investments at 6.1%.
Source: HMRC
Khalaf said: “They remain a minority sport amongst ISA investors, partly because they are a bit more complicated and risky.”
He also added that passive index tracker funds are a popular choice among ISA investors, and they may be favoured above closed-ended vehicles.
For example, four of the top 10 most purchased funds by ISA investors over the past 10 years were passive funds, with iShares Core FTSE 100 ETF taking the lead.
Vanguard’s S&P 500 ETF and FTSE 250 ETF also proved popular, as well as the Fidelity Index World fund.
Among active funds, Fundsmith Equity and Lindsell Train Global Equity, which together have assets under management (AUM) of £29.8bn, were the two most purchased.
Both were leading portfolios across the past decade, with Fundsmith Equity up 368.3% and Lindsell Train Global Equity up 294.9% over the period.
However, both funds are down over the past year as the rotation away from growth and into value drags on their short-term performance.
In fact, the four passive funds were the top performing portfolios on the list over the past 12 months, recording returns of up to 11.1% while all but one of the active funds made a loss.
Total return of the top 10 most purchased funds by ISA investors over the past year
Source: FE Analytics
The proportion of ISA money held in cash has also doubled since 2011/2012, with the amount rising from 2.8% to 5.6%.
This may be due to the fact that many households saved money in lockdown, both from the furlough scheme and less spending on going out.
ISA money held in cash peaked in April 2020 at 6.7% as the recent Covid outbreak caused uncertainty and investors tried to protect their capital.
Khalif said: “ISA investors may well be more aware of the facility to park stock market ISA contributions in cash awaiting investment instructions, or they may simply be a bit more reserved about the market, or both.”
The current economic environment of high inflation and low interest rates is unlikely to have persuaded them to move into markets, which have broadly tumbled in 2022, while the war between Russia and Ukraine has also added uncertainty.
However, ISAs overall remain a popular way to save money free of many taxes, with the total amount held in the tax wrapper leaping £210bn over the past decade, with £399bn invested as of last year.
Data from the Investment Association this week found that inflows into funds in April were boosted by a rise in the amount invested through ISAs, with people invested £683m through the tax wrappers in April.
Overall, around £72bn was subscribed to adult ISAs in the 2020 to 2021 tax year, statistics from HMRC revealed, a decrease of £2.4bn compared to 2019 to 2020, although this was driven by a sharp fall in cash ISA subscriptions, which dropped by £12bn.