ISA ideas: where should cautious investors turn in 2025?

It’s too easy to look at the world as it stands today and declare that this is an opportune time to be a cautious investor. Surely it makes sense to be risk-averse in a time of high geopolitical tensions, economic and social uncertainty. Who wouldn’t want to be at least a little more risk-averse to keep their cash, investments and future prosperity protected?

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Too easy, but also too simple. First, uncertainty is a fundamental part of life, human history and markets. It isn’t something which has just happened in the past three or four years. Second, being a cautious investor isn’t a coat someone puts on when they think times are tough or when they believe they need to reign in the risk when approaching retirement.

Equities are the key piece of the growth jigsaw

Being a cautious investor is a long-term strategy – one based on careful analysis of need and character. So, which types of investments should a cautious investor be looking at to avoid risk but still beat cash returns and inflation?

Job Curtis, manager of City of London Ord (LSE:CTY) investment trust, said that traditionally a cautious investor might want a fund with a mix of assets, including equities, bonds, real estate, commodities and gold.

Curtis says: “The idea is that different asset classes complement each other and reduce the volatility. Usually, equities and fixed interest would form the largest components of such a fund.

“The flaw in such funds is that the returns can be pedestrian. For example, bonds might not produce decent returns in periods of rising inflation and interest rates. Some cautious investors may prefer to be in an equity fund, which should have more upside potential from rising corporate profits. While equities are more volatile, income from an equity fund, based on the dividends from the companies in which the fund invests, will provide a return in difficult markets.”

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Curtis added that investment trusts, which invest in the shares of companies, are therefore worthy of consideration.

He says: “Companies benefit from the growth in the economies where they operate, in the UK and overseas. The investment trust structure is particularly beneficial for those seeking consistent dividend growth.

“In the good years for dividends, investment trusts can save up to 15% of the dividends they receive and put them into a revenue reserve. In difficult years, an investment trust can draw on its revenue reserve to continue growing its dividend.”

City of London investment trust has been growing its dividend for 58 years. In 2020, when FTSE 100 dividends were down by 36%, due to the Covid lockdown, City of London used its revenue reserve to continue growing its dividend.

Spreading risk

Multi-asset funds have the freedom to invest across all asset classes. A popular investment strategy is the 60/40 portfolio – 60% in shares and 40% in bonds – which has delivered respectable risk-adjusted returns over the past decade, aside from in 2022 when interest rates rose significantly. In that year, both shares and bonds made losses.

Going forwards, some investors are cautious on the outlook for that traditional investment strategy due to the prospect of inflation being more volatile and uncertain in the coming years. Investors in this camp include Tom Hibbert, multi-asset strategist at Canaccord Genuity Wealth Management, who made this very point in a recent interactive investor On The Money podcast episode.

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Other defensive assets to size up

Also arguing the case for additional diversification Phil Chandler, head of UK multi-asset and chief investment officer at Schroders.

He points out that although there is always uncertainty in the markets there are real, marked differences in today’s environment.

Chandler explains: “For many years, the only real threat to stock markets has been lower growth for which central banks rode to the rescue with interest rate cuts. That meant bonds rallied and cushioned you.

“If you were a cautious investor with a large part of your risk in bonds you actually did OK. Now there are multiple risks out there. It is not just about lower growth. Sticky inflation is a clear risk as is the fiscal indebtedness of governments, and bonds don’t work with those risks. So, if you are cautious, what do you invest in which is low risk in this world?”

For Chandler this means trying to find other diversifying assets aside from bonds.

Chandler says: “For our global multi-asset portfolio, in the first four years we hardly ever held commodities. But now in a world where commodities are causing inflation, they are a good source of diversification. It is a mixture of broad commodities, industrial metals and gold. It has been very helpful for us in terms of protecting clients.

“Bringing dynamism into your portfolio rather than sitting passively is also important, as is having more diversification in government bonds. We’ve also made use of shorter-duration bond funds to reduce duration exposure (sensitivity to interest rate changes) in a portfolio.”

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Other options for defensive ballast

Simon Evan-Cook, a multi-asset, fund-of-funds manager with over 25 years’ experience in the investment industry, also believes it has never been harder to be a cautious investor.

That is unfortunate, says the manager of the Downing Fox range of funds, due to the number of Baby Boomers hitting retirement at the same time. “The textbooks tell you to move more into bonds and cash, which are meant to be less volatile,” he said.

“But we’ve seen those hit in recent times by inflation. In a time of high inflation, and if you have a 10-year outlook, the best option for a cautious investor is equities. The longer you hold them the more you avoid short-term market movements, and you get the more compounding inflation-linked returns of the companies themselves. The trouble with this strategy is that equities are volatile in the short term, so cautious investors find it hard to hold them because sometimes in a 10-year period they will go down and they can panic and sell.”

Evan-Cook highlights the lower volatile Latitude Global fund and SVS Kennox Strategic Value fund. In addition, he also mentions money market funds and UK gilts as options for cautious investors.  

He added: “You could also consider in terms of diversification taking on some US dollar exposure. We hold the short duration iShares $ Treasury Bond 0-1yr. If things are really hitting the fan in terms of a war starting or a huge economic shock, then the dollar will rise. It is something we use in our cautious mix.”

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Wealth preservation investment trusts

Ben Yearsley, investment consultant at Fairview Investing, focuses on capital and wealth preservation when it comes to cautious investing. “There are funds which have this at the core of their product,” he said. Yearsley highlights Troy Asset Management’s multi-asset Troy Trojan O Acc fund and Personal Assets Ord (LSE:PNL). Both have a mix of equities including Unilever (LSE:ULVR) and Visa Inc Class A (NYSE:V), index-linked bonds, gold and cash, as well as short-dated bonds. “These are inflation-protected investments over time,” Yearsley said.

Another cautiously managed investment trust with plenty of defensive armoury is Capital Gearing Ord (LSE:CGT). The trust aims to preserve and grow shareholders’ real wealth over time, and invests mainly in a mix of equities, corporate and government bonds including index-linked, and cash. Equities are usually accessed through investment trusts and exchange-traded funds (ETFs), but direct equities are also held.

For those investors who want to simply ride out market volatility in the short term before returning to a more risk-on strategy, Yearsley favours buying an individual direct one-year gilt or to stick with cash. “There is nothing wrong with doing that if you are nervous,” he said.