“ISA investors face a very difficult environment at the moment. Global economies remain on a knife edge with central banks fighting deflation by keeping interest rates at rock bottom and pumping more money into the system in the form of quantitative easing.
“Markets are becoming more volatile as they wonder whether the ultimate result will be a deflationary downturn or an inflationary recovery.
“Investors need to think more carefully than ever about downside protection and risk management, as well as the pursuit of gains. At the same time, dreadful returns on cash place a huge premium on safe income.
“This all suggests portfolios need to be balanced and nicely diversified, to confront a range of scenarios, and focus on safe, sustainable income as we remain stuck in a low-growth, low-income world.
“This five-fund basket is designed to try and provide this balance, while keeping running costs low though a combination of traditional funds, Investment Trusts and ETFs.”
iShares Global Government Bond ETF
Bonds continue to surprise and so far this year they are outpacing stocks yet again. This exchange-traded fund should provide some ballast and a little yield, both of which will be welcome if share prices remain volatile and central banks keep interest rates where they are. An ongoing charge of 0.2% keeps costs low.
Schroders MM Diversity Income
This is a multi-manager fund which aims to beat UK inflation (CPI) over time, while making an average 4% annual income payment over a five-year period. At the time of writing the fund has a 50% exposure to stocks, 15% to bonds, 10% to alternative assets and 25% to cash. The ongoing charge is relatively high here, owing to the multi-manager structure, but the potential payback comes via the diversification and downside protection it is designed to offer.
Merchants Investment Trust
Harvesting dividends and then reinvesting them is the secret to long-term investing success and this makes the Merchants Investment Trust one to consider. It seeks to provide shareholders with an above-average income that grows over time and focuses on the UK stock market. It comes with a 6.1% dividend yield and a 33-year track record of increasing its shareholder distribution, as well as a 3.4% discount to net asset value. The ongoing charge is 0.62% a year.
Aberdeen Smaller Companies High Income Investment Trust
A 3.4% dividend yield and strong long-term track record of capital growth may appeal to some investors, especially as the investment trust currently trades on a 14% discount to net asset value. The yield is underpinned by the bond element of the portfolio, while the rest of the fund targets FTSE 250 and small-cap firms that have good prospects of paying a healthy, growing dividend over the long term.
L&G European Trust
Central banks are unlikely to rest until their inflation goals have been met and the European Central Bank seems determined to be the most proactive of all. If president Mario Draghi succeeds, the EU economy gets traction and risk appetite returns then an ISA could benefit from some equity exposure and the L&G European Trust would be an option to consider here. The £155 million fund has a concentrated portfolio full of high-conviction picks and seeks to provide capital gains rather than income.