With this in mind, The Share Centre’s Helal Miah (pictured) shares his top-three stock picks for the 2013 ISA season and explains why they are suited for varying risk levels. The cautious choice: Centrica
With cash yielding next to nothing and inflation above 2 per cent, many investors are still seeking a steady and reliable stream of income.
On these grounds, Miah tips British multi-national utility company Centrica as one of the best plays for those who are still cautious.
"Centrica is a defensive choice with a yield of about 5 per cent and, from an investment perspective, there is hope for some steady growth potential," he said.
Over the last five years, the company has had a fairly volatile ride, but it has outperformed the FTSE 100, making 32.47 per cent, while the index is up 27.48 per cent.
Performance of stock vs index over 5 yrs
Source: FE Analytics
However, the stock has been more volatile than the FTSE 100 over five years, with an annualised figure of 20.73 per cent, compared with 16.8 per cent for the index.
Centrica is currently yielding 4.5 per cent, according to FE Analytics.
"Centrica doesn’t always receive the best press and comes under pressure from consumers and watchdogs as a result of price increases," Miah said.
"In order to mitigate the volatility of open-market gas prices, Centrica has improved its own supply lines, with an increase in production of 12 to 15 per cent forecast for 2013."
"This could lead to other benefits if the UK Government decides to use gas to shore up its medium- to long-term potential energy shortage."
"Centrica is cutting costs in order to deliver £500m in savings for the business. Also, a share buy-back could be on the cards if the group walks away from a nuclear joint-venture."
Seventy-three funds and seven investment trusts hold Centrica in their top-10. Among the highest profile of these are Trojan Income, which soft-closed last week, Fidelity Moneybuilder Dividend and Henderson Cautious Managed.
The balanced choice: BHP Billiton
For investors who are willing to take on a bit more risk, Miah says Anglo-Australian mining and petroleum company BHP Billiton is a good bet.
"Investors looking for exposure to the commodities sector should look at BHP Billiton, due to its size and diversity," he said.
Over the last five years, the stock has consistently outperformed the FTSE 100, its returns of 60.01 per cent more than doubling those of the index.
Performance of stock vs index over 5-yrs
Source: FE Analytics
However, the nature of commodities and resources stocks makes them more volatile than more defensive sectors, such as utilities, and so investors in BHP Billiton need to have a stomach for risk.
The company has an annualised volatility nearly twice that of the index, at 33.42 per cent. It also offers investors a lower level of income, with a yield of 3.17 per cent.
"The key factors to determine the firm’s share price performance in 2013 will be commodity prices, demand for those commodities, and ultimately, the health of the Chinese and global economy," Miah said.
"BHP, like many other basic resources companies, suffered in 2012 as a result of the weakening economic environment, with the level of Chinese GDP growth slowing to about 7 per cent."
"However, leading economic indicators from China released in the last few months of 2012 have painted a slightly better picture."
"In recent years, the company has, and continues to, rationalise its portfolio by making a number of significant disposals to streamline the business and it has invested in large, capital-intensive projects to expand capacity."
"This makes the company well positioned to meet any potential increase in demand."
Miah adds that BHP is one of the least leveraged large cap miners, which adds a level of stability compared with its peers.
According to FE data, 145 open-ended funds hold the stock in their top-10. One of the biggest shareholders is the £656m First State Global Resources portfolio, which has a 9.7 per cent position in the company.
Eleven investment trusts also include BHP as a major holding. These include Phil Doel’s British Assets Trust, which has a 2.6 per cent stake.
The adventurous choice: Imagination Technologies
Miah says those seeking an out-and-out growth play to take advantage of the rapid rise of the market can do a lot worse than Imagination Technologies, a British-based mobile graphics and microprocessor-chip technology producer.
"Imagination Technologies' half-year group revenue increased by 27 per cent to £71.4m, with most of the growth coming from its technology division, where revenues grew 34 per cent compared with the same period last year," he said.
The stock has surged ahead of the FTSE 250 index – of which it is a constituent – over five years, albeit with significantly more volatility.
It has made a massive 435.68 per cent in this time, compared with 51.09 per cent for the FTSE 250.
Performance of stock vs index over 5 yrs
Source: FE Analytics
However, the stock has an annualised volatility of 58.3 per cent, almost triple the FTSE 250's score of 20.86 per cent, according to FE Analytics.
However, Miah expects the company to continue its rapid growth trajectory for the foreseeable future.
"According to industry analysts, smartphone shipments are expected to reach 1.5 billion units annually by 2015 – the company is optimistic that its intellectual property will be embedded in more than half that number," he said.
"Of concern to Imagination will be Arm Holdings’ ambitions in expanding its product range and the takeover battle for MIPS Technologies’ intellectual property."
"However, having Apple as one of its backers and owning the Pure brand of digital radios and other audio products, which have been well received at the latest Consumer Electronics Show in Las Vegas, strengthens Imagination’s position," he finished.
Baillie Gifford Global Discovery is the only fund in the entire IMA universe that holds Imagination Technology in its top-10.