Investors opening a Stocks and Shares ISA right now might consider gaining instant diversification by investing in a global index tracker fund. This approach offers exposure to hundreds or even thousands of companies worldwide, spreading risk across sectors and regions.
It’s a simple, hands-off strategy that can help build wealth steadily over time, without the need to pick individual stocks.
Many investors appreciate the low-costs, long-term growth potential of these passive funds. While global markets can still be volatile, a broad-based index fund aims to capture overall market returns, making it an attractive choice for beginners and experienced investors alike.
It’s no surprise this method has become increasingly popular among ISA investors in the UK.
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This approach can help investors avoid losing money. While a global tracker fund can go down in value, it’s typically less volatile. It may prove a solid base from which to build out a portfolio.
Something a little more intriguing
A cautious investor may then want to consider something like an investment trust. Scottish Mortgage Investment Trust (LSE:SMT) is a large, globally-focused investment trust managed by Baillie Gifford. It aims to identify and support exceptional growth companies, both public and private.
Its portfolio is heavily weighted towards technology and innovative businesses, with top holdings including SpaceX, MercadoLibre, Amazon, and Meta Platforms. The trust has a long-term growth focus and a history of strong returns, though recent years have seen significant volatility, particularly due to its exposure to high-growth and tech stocks.
A key risk for investors is gearing. The trust can borrow money to invest further, which amplifies both gains and losses. As of July, the trust’s net gearing stands at about 11%. If investments fall in value, gearing can increase losses, making the trust more volatile than typical diversified funds.
Personally, I believe Scottish Mortgage has the capacity to outperform a global index tracker. It’s a core part of my portfolio.
An undervalued stock to propel the portfolio
Finally, and of course, an option low on diversification but higher on potential reward is investing in undervalued stocks. For me, Melrose Industries (LSE:MRO) is a great candidate for further research, and appears to be mis-valued.
The company has recently transformed from a diversified engineering group into a focused aerospace pure play, leveraging Risk and Revenue Sharing Partnerships (RRSPs) that provide it with recurring, high-margin income on around 70% of widebody and narrowbody aircraft globally.
Despite this strategic shift and improving earnings, Melrose’s share price has lagged peers like Rolls-Royce and GE, reflecting investor hesitation over complex restructuring and accounting adjustments.
However, with the restructuring nearly complete, the gap between reported and underlying performance is set to close, potentially unlocking significant upside as the market recognises the company’s true earning power.
Valuation metrics are highly attractive. Melrose trades at a forward price-to-earnings (P/E) of just 15.1, compared to Rolls-Royce at 35 and GE at 44, and boasts a price-to-earnings-to-growth (PEG) ratio of 0.75, on an adjusted basis.
There are risks, including the potential impact of supply chain issues in the broader industry on its recovery. However, it’s a really impressive prospect for the long run, with a wide economic moat and sole-source supplier status for 70% of its sales.
It certainly deserves more consideration from the market.
