Five key themes to consider in your ISA portfolio

The end of the tax year is looming. Investors will be making decisions on where to put their final allocation for this year, or where to direct their hard-earned savings for next year. They are doing so at a time when markets are uniquely volatile and hard to predict, as Donald Trump’s tariff regime and geopolitical interventions spook investors. 

These are the five big themes we believe investors should consider when making their ISA choices for the year ahead.  

US or bust?

The biggest decision many ISA investors will need to make this year is whether to keep directing money towards the US markets. US funds have continued to dominate inflows for much of 2024 and early 2025. In general, most global funds or an MSCI World tracker will also have a significant chunk in US market – 74% in the case of MSCI World*. 

There are growing risks to a US-centric approach. The US administration has proved unpredictable, and some of the US’s largest companies may be in the cross-hairs of the tariff regime. Apple, for example, manufactures the bulk of its iPhones in China. There are also concerns about the impact of Chinese AI challenger DeepSeek on the technology giants, and Nvidia in particular. 

Markets have been diversifying over the past six months, and this has accelerated since the start of 2025. That means a stronger performance for European and UK markets over the US, breaking the pattern of the past decade or more. 

For this year’s ISA season, investors may want to lean into this trend. The capitalisation of the entire UK market is less than that of Apple. If money is coming out of these behemoths, it can have a real impact on smaller markets. 

So far, Europe appears to have been the main beneficiary in spite of the region’s relative lacklustre economic performance. We’d suggest Comgest Growth Europe ex UK, or for those willing to be even braver, Janus Henderson European Smaller Companies.  

Read more: Has the US market peaked?

Beyond AI: alternative innovation

2024 was the year that AI took hold. A recent McKinsey report showed that around 65% of companies are now using generative AI regularly**. Companies recognise that AI adoption is now an inevitability and they stand to lose competitive advantage if they do not participate. 

However, amid the focus on AI and the Magnificent Seven, a lot of innovation has been overlooked. AI is only one of nine categories of innovation identified by the team on the Guinness Global Innovators fund. The others include robotics, the future of payments, and FinTech. Manager Matthew Page has his highest weightings in advanced healthcare. 

This may be a more diversified alternative to a Magnificent Seven or AI-heavy portfolio. It still holds six of the Magnificent Seven, but they are not the only, or even the most important, source of growth in the portfolio. Matthew says:” They have had an incredible run, and the market is now having a pause for breath.”

Watch: What does AI have to offer investors in 2025?

The revival of China?

China has been a difficult place to invest in recent years, but there are signs that it is turning around. Stimulus packages in September and November helped galvanise the economy in the final quarter of the year, and the smart money suggests that more may be around the corner with the upcoming National People’s Congress in March. 

China still has plenty of risks. It is in the firing line for Trump tariffs. Its economy remains fragile, with its property market still precarious, and consumer confidence still weak. However, as the arrival of DeepSeek has shown, it has technological prowess and is a world leader in areas such as clean energy, electric vehicles, in drones, in robotics, and in semiconductors. There are companies in China that are totally unique. 

It needs a careful stock picker. FSSA All China, managed by the experienced Martin Lau, is a good option. Fidelity China Special Situations also has a good track record in difficult markets. They are both weeding through the Chinese market to find these areas of growth. 

An Asia ex Japan fund is another option. Baillie Gifford Pacific has around 33.4% in China***. It is targeting high growth companies, and gravitating towards the sectors in which China excels.  

Read more: Will ‘Year of the Snake’ be good or bad news for China?

The revival of the UK

Every time the UK looks like it might revive, it has been knocked back. Towards the middle of last year, investors were excited about the potential political stability from a new government, but it has made a rocky start. A long wait for the budget prompted unhelpful speculation about tax rises, while the employers’ National Insurance rise was a blow for businesses. 

However, amid all these undoubted difficulties, the UK has its upsides. It has greater political stability than many of its European peers. It side-stepped recession in the final quarter of 2024. Inflation is reasonably stable, and interest rates may come down once or twice more this year. After a brief panic in early January, government borrowing costs have dropped significantly over the past month. 

More importantly, the UK markets look very cheap. Private equity and trade buyers have been picking off UK companies, spotting a bargain when they see one. UK companies are taking a similar view, buying back their own shares as a show of confidence in the business. 

If the UK does revive, it will probably be UK small-caps that benefit most. An able stock picker such as Paul Marriage, manager of Premier Miton Tellworth UK Smaller Companies fund, should be able to make hay. Otherwise, a multi-cap fund such as IFSL Marlborough Multi Cap Growth, or with an income tilt, VT Tyndall Unconstrained UK Income, might be a good option. 

Read more: The UK market is not bargain basement, but we are good value

The rise of real assets

Investors have usually relied on balancing equities and bonds to achieve diversification in a portfolio. The problem is that this is an imperfect tool, particularly when inflation is high. In 2022, investors found that bond and equity markets sold off in unison. 

This is where real assets can come in. Vince Childers, head of real assets multi-strategy at Cohen & Steers and manager on the Cohen & Steers Diversified Real Assets fund, says: “The second quarter of 2022 was a real time proof of concept for this. Fixed income and global equities were down, while a diversified real assets portfolio rose.” 

Vince believes this is particularly important at the moment because of the concentration in the global markets. Some real assets – such as infrastructure and property – have had a more difficult time recently and now look lowly valued relative to the expensive US equity market. “It’s a very long time since equity markets were this concentrated. Diversifying a portfolio into real assets should have appeal.”

The Cohen & Steers fund comprises listed real estate, infrastructure and natural resources companies, plus a portfolio of commodities futures. It is designed to provide inflation protection, diversification and a lower beta return. 

Read more: From innovation to income: six funds for your ISA

*Source: MSCI index factsheet, 31 January 2025

**Source: McKinsey & Company, 30 May 2024

***Source: fund factsheet, 31 January 2025