ISA fund ideas for investors looking to add spice to portfolios

The idea of holding higher-risk investments in your portfolio may be a worrying one if you don’t consider yourself to be much of a risk-taker. But if you have a decent time horizon, there are good reasons for having some exposure to relatively adventurous holdings.

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The basic point to bear in mind is that these funds and investment trusts are investing in parts of the market that, over the long term, should deliver higher returns than more cautious areas.

But a long time frame is crucial. As Carly Moorhouse, fund research analyst at Quilter Cheviot, observes: “History has shown that over extended time periods markets have generally increased; however, in that journey there will be periods of short-term fluctuation.”

Moreover, adventurous funds are inherently more volatile than the wider market over the shorter term. Ben Yearsley, investment consultant at Fairview Investing, argues that a fund of this type could (and often does) fall by 10% or more over, say, a few months, but equally could rise by the same amount and more. A cautious fund wouldn’t be expected to do that.

What makes a fund higher risk?

The most obvious factor is that they will generally invest in equities rather than bonds - effectively sharing in a company’s profits and the vagaries of the broader stock market for better or worse, rather than lending to that company or a government by buying bonds that pay fixed interest payments over a set period.

Yearsley suggests several other characteristics may also play a part. “Most funds investing outside the UK are also more adventurous as you will then be taking some kind of currency risk. Another thing that could make a fund more adventurous is having a specific sector focus such as tech (or AI today), healthcare or even smaller companies,” he says.

He also points out that many investment trusts are relatively adventurous, as unlike open-ended funds they may be allowed to borrow to invest to increase long-term returns. “That borrowing works well in rising markets, but works against investors in falling ones,” notes Yearsley.

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How to reduce risk when owning adventurous funds

In having higher-risk funds you need a good mix of holdings in your portfolio, and a long time frame – a decade or more, say – to leave your money invested.

Kenneth Lamont, principal, manager research, at Morningstar, also emphasises the importance of moderation, especially at the racier end of the adventurous spectrum (see his suggested funds below for examples).

“Any investor in these funds should understand they are risky by design and can be highly volatile,” he warns. “They should only form a small portion of a serious investor’s portfolio, maybe less than 5%, or represent 'fun money’ that you are willing to lose.”

Young investors are particularly strongly placed to make use of higher-risk funds because time is so clearly on their side - particularly in regard to investment in their pensions, which they cannot touch for many years. 

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In effect those long timescales mean they can afford to dial up the overall risk profile of their holdings, because shorter-term volatility is not going to have a big impact over decades of investment.

David Lewis, investment manager of the Merlin multi-manager range at Jupiter Asset Management, says when building portfolios the team aim “to harvest the outperformance that high-quality active managers can generate over the long term”.  

He adds: “Within that, we embrace more volatile, sector-specific or higher-risk strategies aiming to enhance returns, while tending to look for risk-mitigation elements within the funds we select – we’re investing in risk, but in a prudent way.”

Investment ideas

For those interested in adding racier funds to your ISA or pension ahead of tax year end an obvious place is to start internationally with Asia. It may face short-term challenges in the face of US President Donald Trump’s tariff threats; however, says Moorhouse, Asia is “home to over half the world’s population and contributing a third of global growth, and is comprised of some of the most dynamic markets, which should only grow in importance over time”.

She suggests Fidelity Asia Pacific Opportunities W GBP Acc fund. “The high-concentration, style-neutral portfolio with 25 to 35 stocks has been run by experienced portfolio manager Anthony Srom for over 10 years, generating very impressive returns since inception,” she reports.

“Given his more contrarian investment style, this portfolio is not highly correlated with other Asian peers and provides diversification benefits to broader portfolios.”

As mentioned above, investment trusts are able to boost potential returns - and risk - by borrowing to invest, so it’s not surprising that many experts turn to them for higher-risk exposure.

At Kepler Partners, investment trust research analyst Ryan Lightfoot-Aminoff likes the small-cap focused abrdn Asia Focus plc (LSE:AAS)trust, which seeks out “exciting, overlooked opportunities in the region”.

He makes the point that “Asian small-caps, in contrast to most developed markets, have outperformed their large-cap peers. They also offer strong diversification benefits to traditional asset classes.”

Emerging markets are currently ripe with opportunities, propelled by long-term structural drivers and historically low valuations, according to Josef Licsauer, another analyst at Kepler Partners.

“Many of these markets are under-researched, often harbouring alpha-rich companies yet to be fully recognised by investors, especially in the small- and mid-cap space.”

For him, a good choice to access emerging market smaller companies is via Ashoka WhiteOak Emerging Markets Ord (LSE:AWEM) trust. It identifies “high-growth, under-researched opportunities, offering diversification away from developed markets”.

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​​​​​​In the open-ended funds arena, meanwhile, Moorhouse picks out Sands Capital Emerging Markets Growth A GBP Acc fund. “This invests specifically in companies that are benefiting from and driving secular change, including digitisation, industry consolidation and formalisation, and life sciences innovation across and throughout developing markets,” she explains.

Smaller companies are a popular and historically rewarding route to higher returns.

There are also interesting thematic opportunities, technology being an obvious area. Peter Hewitt, manager of CT Managed Portfolio investment trust, likes the well-known Scottish Mortgage Ord (LSE:SMT), which holds some US tech giants but also “has exciting technology companies in Europe, Asia and even Latin America”.

He adds: “The trust has exposure to some transformational companies that no other listed investment company has yet it trades on an -10% discount.”

More targeted tech exposure is available through Allianz Technology Trust Ord (LSE:ATT). “The managers are based in San Francisco and so have access to the exciting new technology companies coming out of Silicon Valley,” Hewitt observes.

Alternatively, Lewis picks out an unusual technology fund, BlueBox Funds Global Technology R £ Acc. “In contrast to many of his technology peers, the manager has a keen eye on valuation and tends to shun disruptive, non-profitable companies: it’s an adventurous strategy, but with risk awareness at its core,” he says.

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Yearsley favours the Polar Capital Technology Ord (LSE:PCT) trust, but also International Biotechnology Ord (LSE:IBT) for a different cutting-edge slant.  

Lamont highlights two passive fund options. L&G Clean Water ETF GBP (LSE:GLGG) invests in water technology, and Lamont believes it’s a compelling long-term story, given rising demand for clean water plus the impact of climate change.

“This fund provides a cost-effective means to invest in companies seeking to provide solutions to this global problem, including those in the technology, engineering and utilities sectors.”

A painfully topical alternative is VanEck Defense ETF A USD Acc GBP (LSE:DFNG), which provides investors with access to leading defense technology companies, large-scale cybersecurity firms and defense-relevant service providers. It holds around 50% in US companies, and 30% in European firms. 

"With the US stepping back from its role as global security guarantor, the potential for global conflict has pushed defence to the top of the agenda for most global nations,” Lamont argues.

The volatility of racier investments such as these may tempt investors to try and “time the market” by second-guessing large rises and falls as entry or exit points. But Lamont warns against it. “Our own research has shown this is a fool’s errand, with most ending up much worse off than if they had sat on their hands,” he concludes.