With the end of the tax year fast approaching, millions of UK savers are once again considering how best to use their Stocks & Shares ISA allowance before the 5 April deadline.
However, the backdrop against which investors are making this decision has rarely been more complex given the current geopolitical and market environment. Persistent volatility, shifting interest‑rate expectations, and unusually high levels of concentration in certain equity markets mean that deciding where to allocate this year’s ISA contribution requires careful thought.
Katie Trowsdale, Head of Multi‑Asset Investment Solutions at Aberdeen Investments, says:
“ISAs are great because you can make changes to your portfolio, but you need to stay invested to keep the tax benefits, and that encourages the kind of long-term time horizon investors really need in volatile markets.
“There are various things happening in global markets at the moment, and it can be difficult to keep on top of that. This is where having a multi-asset portfolio really can play a significant role in helping manage that volatility.”
Katie Trowsdale’s tips on building a multi-asset portfolio.
Equities – understanding concentration and genuine diversification
Taking a multi-asset approach to building a portfolio can help investors achieve long-term growth while potentially smoothing out volatility, as different parts of the portfolio tend to hold up better at different times. When one part of the portfolio is struggling, such as equities, other parts like alternative assets can help cushion the impact.
Equities should be a key part of an investor’s portfolio if they’re looking for long‑term growth, but the composition of that allocation is becoming increasingly important.
A handful of very large US technology firms in stock markets means investors could be unintentionally taking on significant concentration risk. Many global equity funds follow market cap-weighted indices, which have a higher allocation to the regions and equities that show strong short-term performance.
This means investors could end up with exposure that is neither as global nor as diversified as they might assume. If they manage their portfolio entirely passively, this could lead to some surprises in terms of the overall allocation.
Rather than relying on recent past performance as a guide to future returns, it’s important to look at how different stock markets behave relative to one another, as well as the valuations they are currently trading at.
Emerging markets and Asian stock markets appear comparatively attractive in this context, where valuations remain reasonable despite recent strong performance. That said, the recent risk‑off environment, including higher energy prices, a stronger US dollar and renewed geopolitical tensions, has put near‑term pressure on emerging market and Asian equities, highlighting the importance of taking a long‑term perspective.
Fixed Income – a more appealing landscape than investors might expect
After a bruising 2022 when bonds and equities both fell at the same time in one of the worst years on record for traditional portfolios, bonds repriced sharply and became more attractive again as building blocks within a diversified portfolio.
The recent rise in bond yields, driven by renewed inflation concerns linked to the Iran conflict, has underlined how quickly interest rate‑ expectations can shift. Gilts recently touched over 4.9% compared to the near‑zero coupons before their repricing in 2022, though it is worth remembering that yields will fluctuate.
When selecting bonds or bond funds for a portfolio, it’s important to pay attention to duration, which is the main way of measuring how sensitive a bond is to changes in interest rates.
Short‑duration bonds tend to offer more certainty and less volatility at a time when market expectations for interest rate cuts continue to shift. Short-duration bond strategies can provide a natural step beyond cash for investors seeking higher yields than cash but without significantly increasing risk.
However, for those willing to take on more interest rate sensitivity over a longer time horizon, longer-duration government or corporate bonds may offer greater potential upside. This is because when interest rates fall, these long‑term bonds tend to rise more in value than short‑term ones, so investors could benefit more if rates drop. Given the latest moves in government bond markets, being thoughtful about duration has become even more important.
Active oversight of allocations to such bonds is essential in today’s environment, as markets continue to reassess how quickly central banks will cut interest rates, which is where a multi-asset portfolio can come into play.
Beyond 60% equities /40% bonds – diversification matters
The traditional 60/40 portfolio has long been a staple for investors, but rising inflation expectations have at times pushed equities and bonds into the same direction, eroding the diversification of returns that investors could expect from the combination.
As a result, other asset classes – particularly those with different drivers of return compared to equities and bonds – have become increasingly important. This includes funds invested in listed infrastructure and funds invested in real estate investment trusts, which have a different level of sensitivity to economic conditions and inflation. Certain types of infrastructure tend to participate fairly well on the upside but can be more resilient during market downturns.
Emerging market debt, which introduces local‑currency exposure and alternative sources of return, is another example of an asset class that can behave differently from mainstream equity and bond markets.
When it comes to alternatives, most self‑directing retail investors can achieve sufficient diversification through fully liquid, daily‑dealt investment funds that blend different asset classes within a single portfolio, such as multi‑asset strategies or fund‑of‑funds.
Katie Trowsdale adds:
“The investment landscape is complex, and building the right asset allocation requires an understanding of correlations, risk, market cycles, and time horizons. For some investors, a good approach is to get involved as little as possible and leave it to a multi-asset manager.”
