Investment Comment: Three principles to guide Isa investors for the long term

Multi-asset funds will likely become increasingly popular as the bumpy global recovery continues

WHEN investing in your Isa, the first step – getting your money in place before the end of the tax year – is the easiest. But now that savers have secured their use-it-or-lose-it annual allowances (currently up to £11,880 in a stocks and shares Isa), many will be thinking about how they can adapt their portfolios to make the most of the markets for the long term. This July’s increased Isa limit (when it rises to £15,000) means it’s even more important to position your savings carefully.

Your Isa should be a direct reflection of your risk appetite. Generally speaking, the longer your investment time horizon, the more risk you’ll be able to take. If you might suddenly need to access your money, you don’t want to be selling investments after they’ve had a difficult period, and so may wish to consider investments with a smoother return profile. How much risk can you realistically afford? How much return will you need to compensate for it? Three key choices – between different asset classes, investment instruments and global regions – all depend on the answers to these two questions.

The first decision should be between asset classes. This will likely have the biggest impact on the performance of your portfolio in the long term. Go for equities and you’ll be exposed to a higher level of risk, but with potential for significant returns. Choose bonds, and you’ll be sheltered from some of this volatility, but unlikely to see as much growth over time. The recent slowdown in China threatens to hold back commodities for a while yet, whereas property’s “pro-cyclical” behaviour could mean opportunities as global recovery continues. Before deciding what’s best for your Isa, think carefully about the way these asset classes behave.

Once you’ve decided on the mix that best suits your needs, think about how you’ll access them. Again, it’s a question of risk. Investing through individual securities (single stocks, bonds or physical property, for instance) means tying your fate to a narrow set of opportunities. But investing through a fund – where managers hold pools of assets – means your risk is spread wider.

“Funds of funds” spread it further still, as managers blend funds together with different styles and exposures to generate smoother returns. There’s also the question of active versus passive approaches – individual security selection, versus strategies which aim to “track” particular markets. While investing through a tracker is often cheaper and gives immediate exposure, this won’t add any value beyond the performance of the index, whereas a good stock-picking manager aims for opportunities to outperform.

The third major decision for your Isa is which global region to invest in. Recovery is underway around the world, but performance varies significantly between geographical areas. Recent data out of the US has been disappointing, largely due to poor weather in the last few months, but we expect a bounce-back this summer (although much of this is already priced in to the market). European growth continues, albeit from a low base, but remains hampered by a strong euro and threatened by further political tensions if growth suffers in the coming months.

China has slowed down – with good reason, as its government looks to rebalance its economy – and this is likely to impact emerging markets, as demand for raw materials continues to decrease. The UK is growing, but the strong performance of smaller and mid-sized companies (key beneficiaries of Britain’s domestic recovery) in recent years means their valuations look less attractive.

It’s tempting to favour a particular region, but when investing for the long term, remember that global recovery means varied regional performance. Spreading your Isa around different geographies adds important diversification, and you can achieve this either by choosing a variety of funds exposed to different regions, or through a good global equity fund.

Deciding on asset classes, regions and investment vehicles is a complex process, particularly as the world continues its varied and uncertain recovery. But there are shortcuts. Multi asset funds can help capture the growth of global markets at a risk level to suit you, as managers can dip in and out of a wide range of assets on your behalf. There are also versions for investors looking for income, with funds that aim to keep a steady income stream through changing market conditions.

My guess is that, as the global recovery continues its bumpy ride, investors will increasingly turn to these multi asset approaches – with considerations of risk at their centre – to make the most of the variety of opportunities in world markets.

James Bateman is head of portfolio management at Fidelity Solutions.