Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under the spotlight.

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Choosing your ISA investments can seem overwhelming given the thousands of options on offer. But help is at hand in the form of model portfolios offered by ISA providers. They’re aimed at investors who don’t want to pay for financial advice but lack the time or expertise to pick their own investments.

Here, I compare the model portfolios of three major ISA providers to see who comes out on top.

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[top_pitch]

What are model portfolios?

Model portfolios are ready-made selections of ISA investments. There’s typically a choice of income or growth, with different sub-options depending on your appetite for risk.

Here’s what the three ISA providers offer:

  • Hargreaves Lansdown (HL): five “master” portfolios of funds selected from their Wealth Shortlist. Investors can choose between three growth portfolios (conservative, medium risk and adventurous) and an income portfolio.
  • Interactive Investor: five model portfolios with three growth portfolios (active, ethical and low-cost) and two income portfolios (active and low-cost). The low-cost options comprise tracker funds and ETFs.
  • AJ Bell: four model portfolios split into three growth options (cautious, balanced and adventurous) and an income option.

Which ISA provider wins the battle of the model portfolio?

I selected the ‘medium risk’ growth portfolio as the most comparable option across the three ISA providers. So, how did they compare?

Round 1: performance

Which ISA model portfolio delivered the highest annual returns over the last five years?

ISA provider

Annual return

Interactive Investor

10.3%

Hargreaves Lansdown

7.8%

AJ Bell

5.7%

The calculations above are based on the ISA providers’ recommendations for a £20,000 lump-sum investment. The overall performance number was based on annualised five-year returns (or the next longest period available) sourced from Morningstar and was weighted by the recommended percentage in each investment.

In first place is the Interactive Investor ISA, delivering an annual return of 10.3%, followed by Hargreaves Lansdown and AJ Bell.

Interactive Investor’s investments in Scottish Mortgage and Standard Life Private Equity paid off, achieving annual returns of 23% and 15% respectively. Legal & General US Index and Rathbone Global Opportunities from the HL portfolio achieved returns of just under 15%. However, AJ Bell’s highest-performing investment, Fidelity Global Special Situations, was some way behind with an annual return of 10%.

Winner: Interactive Investor

Round 2: risk profile

Given that higher returns may entail higher risk, here’s a look at the diversification of the model ISA portfolios:

Hargreaves Lansdown

Interactive Investor

AJ Bell

AXA WF Framlington UK (15%)

Fundsmith Equity (15%)

Fidelity Global Special Sits (30%)

Jupiter Global Value Equity (15%)

Scottish Mortgage (15%)

Fidelity Strategic Bond (23%)

Legal & General US Index (15%)

Ninety One UK Alpha (10%)

Trojan Global Income (15%)

Rathbone Global Opportunities (15%)

Jupiter UK Special Situations (10%)

Ninety One UK Alpha (10%)

Morgan Stanley Sterling Corporate Bond (10%)

Fidelity Global Dividend (10%)

TwentyFour Corporate Bond (10%)

Jupiter Strategic Bond (10%)

F&C Investment Trust (10%)

Jupiter UK Special Situations (6%)

Pyrford Global Total Return (10%)

JPMorgan Emerging Markets (10%)

Janus Henderson Absolute Return (6%)

Troy Trojan (10%)

Jupiter Strategic Bond (10%)

 

 

Capital Gearing (5%)

 

 

abrdn Private Equity (5%)

 

It’s not entirely surprising that the best-performer, Interactive Investor, has 85% invested in equities compared to around 60% for HL and AJ Bell. HL and AJ Bell invested the other 40% in lower-risk asset classes, such as bonds and absolute return funds. These can provide some protection against capital loss in falling markets.

In terms of the overall ISA portfolio, AJ Bell has a relatively concentrated portfolio of seven funds, and almost a third invested in one global fund. Interactive Investor has an interesting selection of investments, including investment trusts and a private equity trust. But overall, HL has a good balance between higher-risk equities and lower-risk assets.

Winner: Hargreaves Lansdown

Round 3: fees

These are the ISA fees across the three platforms:

 

Hargreaves Lansdown

Interactive Investor

AJ Bell

Fund fees

£90

£154

£152

Platform fees

£90

£120

£50

Sub-total (ongoing)

£180

£274

£202

Dealing fees*

£72

£11

Total

£180

£346

£213

* Excluding stamp duty and other dealing costs

Fund fees are the annual fees charged by the underlying investment managers, while platform fees are charged by the ISA providers. Hargreaves Lansdown and AJ Bell both charge a percentage of your ISA value, although HL is somewhat higher at 0.45% compared to AJ Bell’s 0.25% (for ISAs up to £250,000). Interactive Investor charges £9.99 per month, which is a lower-cost option for people with a higher-value ISA.

Dealing fees are charged by both AJ Bell (£1.50) and Interactive Investor (£7.99) for buying funds and trusts.

While AJ Bell offers the lowest ISA platform fee, its fund fees add up, as do Interactive Investor’s. Hargreaves Lansdown offers the lowest overall fee due to lower fund fees (partly due to their negotiated discounts) and no dealing fees.

Winner: Hargreaves Lansdown

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Overall winner

I’m going to award first place to Hargreaves Lansdown for charging reasonable fees and delivering strong performance with some protection in falling markets.

Interactive Investor comes a close second, achieving superior returns, but its more adventurous style may be a riskier option. Its fees are also relatively high for lower-value ISA portfolios.

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