4 ways adventurous investors can boost their ISA

Staci West (SW): Emerging markets are a long-term favourite for embracing more risk. The idea here is to put your money in areas of the world that are developing rapidly. However, they can be volatile as they’re more unpredictable countries and companies.

Another approach is to consider adding specialist funds to your portfolio. The specialist sector offers a range of funds and assets for investors looking for something off the beaten track.

One area to consider here is artificial intelligence, which only continues to grow across all areas of our day to day lives. The companies behind such high-tech products are likely to be on the radar of Chris Ford, manager of Sanlam Global Artificial Intelligence fund.

Chris Ford: “Artificial intelligence continues to perform extraordinary leaps in its capabilities. Over the course of the last few weeks, we’ve seen the launch of chatGPT, which has taken natural language processing to yet new levels. And we expect that these benefits, that AI is capable of delivering, will be finding their way into the global economy, in more and more and deeper and deeper ways over the course of the coming years.

We launched our fund in 2017 and we hope we’ve delivered more than acceptable returns for clients over the intervening period. But our fund today, after the market disruption of last year, trades more cheaply than it did in 2017. And yet, so many of the benefits of AI stand in front of us, the benefits of AI are already there for us to see. But as this technology is driven hard, right the way throughout the global economy, the opportunity to create significant value by those companies that are engaged in a meaningful way, is very, very apparent. And we think that now is absolutely the time to be looking very hard at investments in this space.”

SW: Another specialist area that has come back into favour recently is commodities. Commodities have long been a favoured way to help diversify a portfolio, especially when the global outlook is looking particularly uncertain. TB Amati Strategic Metals fund co-manager Georges Lequime believes there’s a mismatch in the market.

Georges Lequime: “We’ve just gone through two to three decades of underinvestment in the production and extraction of metals, just at the same time as we are moving towards more energy intensive industries over the next coming decades with the decarbonisation, with the move to electric vehicles. So, this is where you’ve got a mismatch between growing supply and demand – growing demand, sorry, – and supply that’s battling to catch up. And we think that this will keep metal prices high for quite a while, while we recapitalise.

So, for the next decade, we think we are going to get a growth in the production of these metals just to meet increased demand. And that’s really, as an investor, you want to be invested in the recapitalisation of any industry. And I think this is the start of the recapitalisation that we’re seeing over the last year or two, but we think it’s going to happen for the next eight years.”

SW: But specialist funds are the only way to spice up a portfolio — you can also invest in a fund that focuses on smaller companies. Some of these funds will focus on particular regions — such as the UK or Europe — while others take a more global approach. Choosing which one suits you best will depend on your investment goals, how you see the outlook for certain markets, and your attitude to risk.

Part of the attraction of smaller companies is that you’re exposed to innovative young firms that are off the radar of many investors, and they have good growth prospects ahead of them. Will Cuss, co-manager of the Barings Europe Select Trust, a fund which invests in small and medium-sized companies highlights three key benefits of smaller companies.

Will Cuss: “I think it’s an interesting time for the asset class because we have a cheaper entry point into what is a high-growth asset class. And I think it’s important to remember the long-term growth opportunity here, and how smaller companies do outperform over the long run. So, there are three reasons I’d highlight:

One, they’re able to tap into higher growth niches that are often underserved by larger cap peers. Two, they’re more likely to be the disruptors and the innovators in their industries. So less encumbered by old tech stacks or bloated admin functions, et cetera. And three, smaller companies are more likely to be taken out. They’re more likely to get an attractive bid from a large cap or indeed private equity.

SW: Paul Marriage, manager of the TM Tellworth UK Smaller Companies fund gives more insight into what this growth potential can mean for investors in 2023.

Paul Marriage: “One of the things about small companies is you’re buying them at their fastest point of growth. One of the things I often say; it’s a little bit like finding something that’s three, like a toddler who can walk and talk and make profits like the small companies we invest in. And you are owning them until they become a tricky teenager at 14! So, your share price is going from three to 13 [GBP]. That’s when small companies – so 300 million to 1.4 billion [GBP] perhaps. That is where you get the small companies’ growth base. And that’s obviously a time when a share price can multiply several times. The maths just kind of tells you that.

So, if you can buy that sector that does that over the long term, at a point where it’s really depressed, it’s a really interesting opportunity I think right now. So, I think ‘23 could be the time to buy small caps – when you’ve caught the trough and you get the growth.

And one other important thing to say is when small cap has bad years and then recovery periods, the recovery periods are usually longer and bigger, if we look at history. But also the first six months of the recovery period are really important if you want to get all the outperformance: you get a lot of turbo booster performance in that first recovery phase. So, if you catch that in ‘23, maybe the ISA season – that kind of end of Q1 time – could be a good time to look at small caps.”

SW: Whether or not you’re looking to add a higher level of risk to your portfolio will depend on your own preferences, including considerations such as a longer-term time horizon. To learn more about how to construct a portfolio — or to research all Elite Rated funds — visit fundcalibre.com