How to build a higher-risk ISA portfolio

“Easy” might be an overstatement, but it’s generally simpler to invest more aggressively for growth than to defend what you already have.

That means that building an adventurous portfolio should be more straightforward than taking a cautious or balanced approach.

Like all these terms, “adventurous” can be subjective and open to definition. But for argument’s sake we can imagine someone who has a good time horizon (at the very least five years and likely much longer), and is happy to ride the ups and downs of markets.

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As with the cautious and balanced approach, we will look at some funds available for those wanting to take a hands-off approach, and set out our own hypothetical list of investments for adventurous types building an ISA.

Outsourcing your adventure

While we landed on a mere 20% equity content for the “cautious” portfolio and 60% for its balanced counterpart, an adventurous investor should be all-in on so-called risk assets. We’re largely talking about equities here, although some other asset classes such as private equity do count, too.

Investors with an adventurous attitude but less interest in managing the portfolio have plenty of options: there’s the humble MSCI World tracker, which has done well by investors over the years but comes in for criticism over its high US equity content.

There’s the FTSE All World tracker, which is slightly diversified into emerging markets, if not hugely so. And to mention a member of a franchise frequently discussed in these pieces, the Vanguard LifeStrategy 100% Equity A Acc fund diversifies past the world’s biggest market. It has about half its portfolio in the US, with much more in the UK (around 25%) than the average tracker fund.

Having said that, LifeStrategy’s rivals also pack in a bit of home bias and, in some cases, very low US allocations, as the table shows.

Source: Recent factsheets. *We have based the MyMap “Europe ex-UK” weighting on its stated allocation to a Europe fund, rather than its stated Europe allocation which differs.

There are also, of course, actively run global equity funds, although not all these have a wide enough reach to house your entire investment.

Names such as Fundsmith Equity I Acc and Scottish Mortgage Ord (LSE:SMT) arguably have too tight a focus to serve as your only holding. But names like Alliance Witan Ord (LSE:ALW), F&C Investment Trust Ord (LSE:FCIT), Brunner Ord (LSE:BUT) and Bankers Ord (LSE:BNKR) do a better job on this front.

Investors could, of course, match up a handful of global equity funds with different styles and areas of focus.

How our portfolio shapes up

As discussed, this hypothetical portfolio is definitely all-in on risk assets, with a 92% allocation to equity funds and 8% in funds focused on private companies.

As with the balanced portfolio, we use an S&P 500 tracker as a core holding and use a handful of active funds with different styles or approaches to cover the main equity regions, from the UK to Europe, Asia and Japan.

We have left the S&P 500 on a pretty low weighting of just 35%, which adventurous investors could choose to dial up or down. But we like the idea of giving more room to other areas, especially at a time when investors have woken up to the existence of markets beyond the US.

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Those who looked at our balanced portfolio, will see some familiar fund pairings, be it Artemis UK Select I Acc  and IFSL Marlborough Special Sits A Acc or Nippon Active Value Ord (LSE:NAVF) and Man Japan CoreAlpha Profl Acc C.

We like to blend funds that have contrasting styles and approaches, so that they even out one another’s performance over time and give some diversification.

But a few changes are worth bearing in mind as we crank up the risk. We have increased position sizes for those fund pairs and added in a few satellite positions to boost portfolio growth.

The new names

We introduce a handful of names that are promising, especially in the longer term, even if some are already extremely well known.

Scottish Mortgage certainly fits that description: it has generated huge long-term gains and is something of a household name.

But the volatility involved in its growth investing style can require patience. That’s demonstrated amply enough by its meagre five-year share price total return, which reflects the effects of the trust’s woes in 2022.

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Then there’s AVI Global Trust Ord (LSE:AGT), which we like for its value and activist-minded approach, and its targeting of companies not well represented in global trackers.

The fund likes an odd mixture of businesses, from family-run holding companies to investment trusts trading on discounts to firms in Japan and, as of recently, South Korea.

The team uses activism as a way of spurring improvements at investees. We spoke to the team earlier this year about the fund’s hunt for value and the current state of the investment trust sector.

Going private

Scottish Mortgage is known for its allocation to private companies, an area in which it recently crossed a self-imposed threshold thanks to an upward valuation of SpaceX.

Private companies more generally have generated big returns in the last decade, although some ascribe this to a protracted period of low interest rates. But with more companies staying private for longer, we like the idea of adding a private allocation into the portfolio.

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There’s only one very diversified fund in the form of HarbourVest Global Priv Equity Ord (LSE:HVPE).

It has made impressive returns over a five and 10-year stretch, but its wide spread of assets is its key attraction.

The trust largely invests via a wide range of private equity funds, meaning it has underlying exposure to an enormous number of different companies. That gives it substantial diversification, allowing it to ride out some of the ups and downs of a risky sector.

Some criticisms are worth bearing in mind. As mentioned, private equity may have a more troubling time in an era of higher interest rates. Meanwhile, like many of its peers, HVPE has long struggled with an enormous share price discount.

Funnily enough that has attracted the attention of Asset Value Investors, who run the AVI Global trust in this portfolio. They have called for HVPE to put itself up for sale.

The trust is also harder to judge than a more concentrated private equity trust. Those investors who do like to run the rule over their underlying holdings might prefer a more focused name such as Oakley Capital Investments Ord (LSE:OCI).

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The final holding, again, focuses (predominantly) on private companies, and is a punchy bet.

Seraphim Space Investment Trust Ord (LSE:SSIT) focuses on “space tech”, which is an exciting area itself but has also served well as a play on growing defence spending.

A good number of its holdings have signed defence contracts, something that has helped to boost the trust’s strong returns.

This is definitely one for an adventurous investor, given that it can be pretty volatile and comes with a highly concentrated portfolio. But it seems to tap into investment themes that should run for a long time.