Are you an ISA adventurer or belt and braces investor?

Choosing where to put your annual ISA allocation is no easy task. There are so many possibilities, variables and conflicting opinions that deciding which areas will deliver the best returns with any degree of certainty can feel like mission impossible. This is understandable. While everyone wants to invest in the best-performing funds the reality is there is no one-size-fits-all solution. The decision on which funds to choose – and the returns they can deliver – depends on several factors.

In many cases investors faced with such a conundrum may seek inspiration by considering what has performed – or failed – in the past. After all, it can be hard to ignore a fund that has supplied double-digit returns in recent years. Past performance might not be a guarantee of future success but it can be a good starting point and shouldn't be ignored, according to Andy Gadd, head of research at Lighthouse Group.

"It can be a useful tool in searching out investment managers who consistently outperform or indeed underperform their benchmarks," he says. "These figures can sometimes tell you where you are in an economic cycle and whether you should be looking at defensive or growth oriented investments."

Sector sales and performances

So what do the statistics tell us? Well in 2010 ISA providers enjoyed their most lucrative year since 2001 with net retail sales of £3.9bn and ISA funds under management reaching a whopping £105.5bn – the highest figure on record.

In terms of gross sales, the most popular IMA Sector chosen for ISAs in 2010 was Cautious Managed (£1.7bn), followed by UK All Companies (£1.6bn), Unclassified (£1.4bn), Corporate Bond (£1.2bn) and Strategic Bond (£1.1bn).

However, were the investors that opted for those sectors correct? Yes and no. The best-performing sectors last year were North American Smaller Companies, where the average fund rose 32.91% , and UK Smaller Companies – up 30.73%.

Cautious Managed, meanwhile, enjoyed only a 9.16% uplift, while UK All Companies achieved 17.19%, according to Morningstar. The IMA £ Corporate Bond, however, was up only 7.76% and £ Strategic Bond by 8.64%. These weren't bad performances, only comparatively lower than other areas.

Fund performances

There is a huge gulf between the best and worst performing funds – regardless of the time period in which you analyse them. The stars can generate double or triple-figure returns while the poorest will be mired in nega tive territory.

For example, let's take a look at the figures for the past decade that have been compiled for us by Morningstar.

The stand-out performer over this time has been the BlackRock Gold and General fund that has delivered a simply stunning return of 998.66%, according to the data to February 25, 2011.

This is more than 200% more than its nearest rival – JPM Russia – which managed a highly respectable 765.92% return over the same period. JPM Natural Resources was next up with a rise of 758.95%.

However, at the other end of the scale you have the Newton Osprey fund which is down 58.8% and Invesco Global Technology that lost 55.56%. A further 16 have shed more than 20% of their value.

Over the past five years the best performers have all hailed from a relative handful of areas. Seven out of the top 20 funds are in the IMA China/ Greater China sector, while six are in Asia Pacific excluding Japan. Others represented include funds focused on the likes of India, Latin America and resources.

The figures don't come as a surprise to Darius McDermott, managing director of Chelsea Financial Services. "Funds with access to natural resources have done very well – particularly those linked with gold," he says. "Therefore if you think the gold price will continue to rise you might want to invest in such past winners."

So how should you choose?

As always, it depends on your investment goals and attitude to risk. If you don't need the money over the next few years and losing it all – in the worst case scenarios – holds no fear, then it might be worth investing it in areas that offer more potential upside, along with an increased amount of risk.

Many investors place too much emphasis on short-term past performance and market sentiment, assuming that if an asset has performed well it will continue to do so, points out Patrick Connolly, head of communications at AWD Chase de Vere. The net result is that they may end up buying at the top of the market.

"Past performance should be an important consideration when selecting investment funds," he says. "However, the key is to understand why an investment has performed well or badly and what is likely to change in the future."

Nobody should put money in a Stocks & Shares ISA if they can't invest for at least five years, but how much emphasis is placed on past performance will depend largely on what type of fund they are investing in, according to Darius McDermott.

"If they just want a standard UK fund then they can look at the fund mangers that have performed consistently well," he says. "All managers are allowed the odd bad year but the likes of Tom Dobell at M&G Recovery and Nigel Thomas of Axa Framlington UK Select Opportunities tend to do well at least three years out of five."

What are people buying now?

Sales figures compiled during January 2011 by discount broker Willis Owen suggest investors are continuing to look for adventurous global funds with which to populate their ISA portfolios.

Neptune Global Equity, First State Asia Pacific Leaders, Aberdeen Emerging Markets and JPM Natural Resources are among the 10 most popular funds, alongside more traditional names such as Invesco Perpetual Income.

Alan Easter, director of Willis Owen, attributes this to a combination of rising levels of inflation and savings rates at historically low levels forcing people to consider looking at alternative investment options.

"The Neptune Global Equity fund is one for the more adventurous investors because there is often reasonably high exposure to higher- risk markets within this globally invested fund," he adds.

It's a similar story with online execution only stockbroker Selftrade, which states that resources and financial services stocks were firm favourites for ISA investors, the former making up 42% of the top 20 ISA trades.

David Baker, dealing danager at Selftrade, added: "We believe that hard resources like metals will continue to be popular choices among investors. However, we are also seeing a growing appetite for soft commodities like corn and wheat."

Over at Chelsea Financial Services, Darius McDermott has noticed increased interest in funds that focus on smaller companies. "We like Marlborough Special Situations and that is proving popular," he says. "Clients are also buying Standard Life UK Smaller Companies and BlackRock UK Smaller Companies."

Many investors tend to be either emerging market or income oriented at the moment but the fact is there is no stand out themes, according to Mark Dampier, head of research at Hargreaves Lansdown. "I don't think there's any one favoured area because sales are happening across the board," he says. "Invesco Perpetual Income is a perennial favourite, as is Aberdeen Emerging Markets, but natural resources funds are also selling well because they have all done well in the recent past."

So what is the overall conclusion? Well the evidence suggests investors must not be influenced by short-term past performance, market sentiment or hype as these can cause problems, points out Patrick Connolly at AWD Chase de Vere.

"They should establish a long-term investment strategy determined by their financial objectives, circumstances and attitude to risk and then stick with this until or unless their circumstances change," he says. "Chasing the next big winner is a high- risk strategy which could be successful but is more likely to end in tears."