In heavy going, put your money on a tortoise

In heavy going, put your money on a tortoise

If you bought a UK equity Isa this time last year, chances are you lost money: the FTSE 100 has fallen 7.5 per cent since then, while the FTSE 250 index of medium-sized companies and the small-cap index have done much worse. If you were seduced by the heavy promotion of property funds as being relatively low risk and having a low correlation with stock market performance, you will be even more disillusioned: flagship property funds from the likes of New Star, Norwich Union or Aberdeen all show losses of about 20 per cent.

Small wonder that investors are lukewarm about equity Isas. Nor are fund managers promoting any particular sector or specialism, reckoning that it is hardly worth their while spending heavily on promotion when stock markets are depressed, economic slowdown is looming and rising interest rates and falling house prices are hitting consumers.

But anyone brave enough to invest when markets are tumbling will often do better than those seduced by good historic returns - ask the investors who piled into property in 2007 on the back of three spectacular years. Of course there is no guarantee markets will not fall further - the recent see-sawing of markets suggests investors are still uncertain about how bad things will get - but that is more of an argument for choosing defensive funds, or for using the facility offered by most financial advisers to use up your allowance now and defer investing it for a few months. Inland Revenue guidelines.....continued below

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give no specific timescale over which the money should be invested, but most advisers think six months is a good rule of thumb.

Richard Philbin, co-manager of F&C's multi-manager fund range, thinks boring will be best this year. That means avoiding higher-risk areas such as Asia or emerging markets in favour of more cautiously managed products. Philbin points out that new European rules can give fund managers more scope to use derivatives and hedging techniques to limit the damage from falling markets, but he adds that they have been reluctant to use these powers to develop more cautious funds - indeed, many are using them to increase risk.

One fund manager who has been taking advantage of the greater freedom is Mark Lyttleton, manager of the UK Absolute Alpha fund - one of the funds suggested by Adrian Lowcock, senior investment adviser at BestInvest, who is impressed by its ability to make money in falling markets. 'Over the last six months, it has not fallen in the way that pure equity funds did. It will not shoot the lights out on the way up,' says Lowcock, but, like the hare and the tortoise, it makes up for that when the going gets difficult.

Tim Cockerill, head of research at Rowan, thinks investors should consider corporate bond funds. While corporate bonds had been looking expensive, the credit crunch has sent their prices tumbling. Thus their yields have been soaring. Bonds issued by some of the banks and other financial companies, for example, are now yielding more than 10 per cent. Cockerill thinks there is potential for corporate bond funds to produce a return of as much as 10 per cent this year - attractive if stock markets remain difficult - and recommends the Artemis Strategic Bond fund, Invesco Perpetual's Monthly Income Plus and F&C's Strategic Bond funds.