'Is it time to overhaul my £260,000 Isa?'

The past two years have seen a sea change in stocks and funds worth including in a portfolio. So someone who set out their investment strategy in 2008 might feel a little out of sorts.

James, 39, has been investing for 15 years, a period during which interest rates were low and growth assets were all the rage. Now that the tide has turned, he is wondering what changes to make to the portfolio that he manages for himself and his wife. “The current investing environment is clearly quite challenging and has made me rethink my investments,” he says.

James first submitted his investments to the Portfolio Clinic in 2021 - How should I invest to fund a new home and my children's education? (IC, 5 March 2021). He now wants to rearrange his own and his wife's £263,000 individual savings accounts (Isas) to ensure they are fit for purpose. The Isas form part of a much larger £3.1mn portfolio, which includes a property, pensions, funds and bonds via wealth manager St James's Place, venture capital trusts (VCTs), enterprise investment schemes, junior Isas and cash (see table below). Although some of this has been earmarked to upgrade his family home.

The Isa portfolio is invested for growth with a long time horizon of around 20 years. James aims for an annual return of 4-5 per cent and is prepared to see the portfolio’s value drop by up to 20 per cent at any given time. “I want to grow the portfolio over time to enjoy a good retirement in the years to come, and give our two kids a good start in life,” he says.

The portfolio predominantly invests in equities. James has focused on themes he considers “crucial”, such as the energy transition, as well as healthcare and tech, which he feels provide opportunities for superior returns. There is some exposure to income and bond funds. He plans to sell his holdings in fintech, VCTs and property, which have recently been out of favour, as soon as market conditions allow, although he still likes VCTs and private companies in general.

James says: "The Isas are invested for growth so I can enjoy a good retirement. This is why they are heavily focused on stocks, which provide the best return over time.

"I have learnt a lot over the past decade or so and now want to see if I can beat my wealth manager at St James's Place. I have focused on some key thematics such as funds that benefit from the energy transition, and healthcare and tech, which offer a good chance of superior returns. I have balanced this with more conservative dividend strategies, bonds and low-cost exchange traded funds (ETFs). I also like investment trusts for their dividends and flexibility."

"I have been thinking about moving this money into multi-asset, total return and value company funds as well as boosting my exposure to Asia."

Before equity markets dropped last year, he realised some of his gains in order to reduce the number of holdings he managed. He is wondering how he should invest the £20,000 cash he currently has in the portfolio, as well as the full Isa allowances for this tax year.

He adds: "I would appreciate some thoughts on whether the Isas are too broad or too diversified, and any tips or thoughts on where I should invest next."

Darius McDermott, managing director at Chelsea Financial Services, says:

You have started investing nice and early, with a realistic view of potential returns and the ability to stomach some volatility. The funds you have picked are by and large very good, and there is a nice mix of active, and passive, funds and trusts.

With a significant pot of money in addition to the Isa, I would suggest you can afford to take a lot of risk. The investment environment has changed, but your goals haven’t, so there is no real need for wholesale changes – rather tweaks to keep things on track.

You have some strong views on thematic areas, and arguably these themes currently make up the ‘core’ of the Isa portfolios. There are not a huge amount of out-and-out growth funds, but there are also no value funds at all, and arguably the economic circumstances line up well for that right now – your Fidelity fund has a value tilt but isn't out and out value. Your Fidelity fund has a value tilt but isn't out and out value, so M&G Global Dividend (GB00B39R2Q25) and TM Redwheel Global Equity Income (GB00BMBQMY84) are worth a look. The added bonus of a global equity income fund is that dividends are likely to play a larger role in total returns in this lower-growth environment.

When it comes to selling the property, fintech and VCT holdings because they are out of favour, I would caution against it right now – especially as you like some of these areas. Chrysalis (CHRY), for example, is a good trust, but currently trading on a near-50 per cent discount to net asset value (NAV). Personally, I’d be doing the opposite and topping up a little. TR Property Investment Trust (TRY) is also a good trust and adds some diversification. Maybe be patient a while longer?

When it comes to multi-asset funds, if you want to add more of a ‘standard’ core to the Isas, consider a fund such as Liontrust Sustainable Future Managed (GB00B8FDBQ23), which will sit well with your views on the energy transition, or Jupiter Merlin Income (GB00B4N2L746), as a tried-and-tested fund of funds. 

Bonds are also a compelling option and, as and when interest rates peak and yields start to fall, some decent capital returns could be made. So if you want to diversify you should consider adding some money to a bond fund such as Royal London Corporate Bond (GB00B87FJ401) or M&G Optimal Income (GB00B1H05718). 

Stewart Investors Asia Pacific Sustainability (GB00B0TY6V50) is a very good core Asian equity fund. If you want to add another Asian offering with a different style, consider Invesco Asian (GB00B8N44Q86), which has a value tilt, or JPM Asia Growth (GB00B235GR40). 

In terms of the number of funds, with a pot of money this size and an obvious interest in the subject, you could probably go up to a maximum of 30.

Karen Lau, senior investment manager at JM Finn, says:

Having enjoyed over a decade of full employment, low inflation and low interest rates, the stable 'Goldilocks' period (not too hot and not too cold) is now over. I believe your long-term strategy is sound, but perhaps you should consider a tactical change, as it is always helpful to stay adaptable to the changing economic environment. 

For the first time in a decade, we have been able to enjoy a respectable reward for taking less risk through gilts, with two-year bonds offering north of 5 per cent. This does not take inflation into account, but it does show that in times of uncertainty it is worth revisiting their risk-reward profile, while still believing in the long-term growth potential of stocks.

The benefits of diversification were heavily debated last year when both bonds and equities fell, despite supposedly having a low correlation. The advantage of investing in equities, as the old adage goes, is about time in the market. The benefit of compounding is powerful and over a lifetime is more likely to beat inflation. 

But having mixed assets to improve diversification can help smooth your returns, and where different asset classes are introduced that can benefit from low correlation. With a possible 15 to 25 years of working life left, you can tolerate a higher proportion in equities, but I suggest having some alternatives.

You were astute to take some profits before the market fell. So now you could look at buying gilts. You could also do this outside of your Isa and use your allowance elsewhere, as purchasing gilts below par means they benefit from a tax-free capital gain.

Since you are looking for a 4-5 per cent long-term annual rate of return, consider a bond fund with your dry powder. There may be short-term pain as interest rates rise, but we are arguably closer to the top of the hiking cycle. The other option would be to buy companies that provide a covered and sustainable yield. Both these alternatives would offer the portfolio some defensiveness.

Concentrating on long-term themes is sensible as these are resilient to changing demographics. I note that you prefer overseas assets, where exchange rates are an added consideration. So you may wish to look under the bonnet of the global funds to see where the geographical allocations are, and ensure that you invest in regions such as Southeast Asia, India and Japan, all of which have their own attractions.

You mention adding multi-asset and total return funds, but you seem pretty capable of allocating your investments yourself, so I wonder if these are really necessary.