Diversification is often cited as a way to reduce risk when investing. When combined with the tax benefits of a Stocks and Shares ISA, the two make a powerful team!
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
With investments diversified across various industries and regions, localised losses are minimised. And in many cases, they’re offset by gains made in other areas.
With an investment trust, it’s possible to diversify into an unknown region or unfamiliar industry. Rather than learning about an entirely new market, investors can let the trust do the hard work.
Here are three UK investment trusts investors may want to consider as a way to diversify an ISA account.
The best of the West?
Scottish Mortgage Investment Trust (LSE: SMT) is a is a popular option for investors seeking US tech stock exposure. Despite the name, it leans far more heavily towards US tech stocks than anything based in Scotland.
Some of its largest holdings include Nvidia, ASML, Amazon and Tesla. A few non-tech holdings include Moderna, Ferrari, and Ocado. In this way, it provides exposure to both the UK and US markets and diverse industries like healthcare, retail and luxury goods.
However, the price has been volatile. In 2020 it climbed 112% only to collapse by 46% in 2022, making it less attractive to risk-averse investors. Still, it’s up 315% in the past 10 years, delivering annualised gains of 15.3% per year. Its price-to-earnings (P/E) ratio is still low at 8.5, giving it room for more growth.
Eastern exposure
abrdn Asian Income Fund (LSE: AAIF) primarily invests in Asia Pacific securities with higher-than-average dividend yields. This makes a great income stock for those looking to compound returns and save for retirement. Some of the top 10 holdings include TSMC, Samsung, BHP and Rio Tinto.
While some Asian markets have struggled to recover since Covid, abrdn Asian has faired better than most, up 8% in the past year. But slow earnings have pushed its P/E ratio up to 39.4, more than double the industry average. As such, I wouldn’t expect a lot of growth from the shares.
Fortunately, it has a 5.5% dividend yield that’s well above the FTSE 100 average of 3.5%. This makes it a solid earner even if the price remains stagnant. Being an Asia-focused trust, it’s at risk from issues like the US-China trade war and a sluggish post-Covid economy.
Something closer to home
BlackRock Greater Europe Investment Trust (LSE: BRGE) focuses on stocks in Europe, including some of our best homegrown companies like RELX. This protects against issues such as the recent market slump following comments from US politicians regarding Taiwan and the export of semiconductor technology to China.
With holdings including Novo Nordisk, ASML, Ferrari and LVMH, there’s a good mix of healthcare, tech and luxury stocks. The stock price was also hit by the 2022 economic downturn but has made a spectacular recovery, climbing 43% in the past two years. And with a P/E ratio of 5.3, the shares still look cheap to me.
Naturally, the stock is at risk from any localised issues affecting the European economy. The ongoing Ukraine-Russian conflict and knock-on effects from the war in Israel are two such examples. It also comes with a higher-than-average annual charge of 0.98%, so this will eat into any returns.
