Your guide to interactive investor’s five Model Portfolios

Short on time or confidence when it comes to investment decisions? We explain how our model portfolios work and how they can help you reach your financial goals.

What type of investor are you? Interactive investor customers who invest predominantly in collective funds rather than individual companies are typically interested in growth funds, such as Scottish Mortgage (LSE:SMT), Fundsmith Equity and others that focus on “new economy” themes and quality growth ideas.

• ii Super 60 investments: Quality options for your portfolio, rigorously selected by our impartial experts

But if you are seeking a reliable income with the expectation of capital growth then you have likely already discovered the attractions of investment trusts. Some, such as City of London (LSE:CTY) and Murray International (LSE:MYI), have kept their dividends growing through the recent lean times for income seekers. 

• Read about our: Top Investment Funds | ACE 40 Sustainable Investments | Transferring an Investment Account

You might also be one of the large cohort of investors who prefer not to place their money and their trust in actively managed funds or investment trusts, preferring instead to seek income or growth – or a balance between the two – via index-tracking investment vehicles.

Growing numbers of interactive investor customers would also like to pursue any one of these aims while also being responsible investors, with environmental protection and other sustainable investment themes in mind. 

The strong performance of funds and trusts such as Royal London Sustainable Leaders and Impax Environmental Markets (LSE:IEM) demonstrates that investors do not need to sacrifice profits for principles when they can have both.

Nevertheless, the vast choice of routes to take – via thousands of funds, around 400 investment trusts and thousands of exchange traded funds (ETFs) – can make it something of a minefield as you try to reach your investment goals.

interactive investor’s Super 60 and ethical ACE 40 lists are designed to help you find a route through this minefield. All of the above-mentioned funds are not only members of our go-to fund lists, they also feature as constituents of the five interactive investor model portfolios. 

From 1 April 2022, Morningstar took over the day care of our five model portfolios. As a result, a handful of changes have been made – with new constituents, ejections, and tweaks to the percentage weightings to some of the holdings. Check out our model portfolio page.  to find out which funds are held in the models. 

• The funds in and out of our Model Portfolios 

How interactive investor’s model portfolios can help 

Many investors do not have the time or the confidence to make their own investment choices, which is where interactive investor’s model portfolios can help.

Generally speaking, they can be used either as reference tools for selecting individual funds from specific asset classes and areas, or the constituents can be purchased individually as the building blocks of a relatively adventurous and diversified portfolio.

More specifically, there are a variety of financial goals they are designed to help people meet. 

The three growth portfolios could be viewed as being suited to investors looking to grow their capital over 10 years or more, who can afford to lose some of their capital under a worst-case scenario. 

The growth portfolios may suit investors with very young children seeking to build up capital via an ISA for their further education or to help older children build up a deposit for their first home.

Investors in their 40s or younger who want to build up a nest egg or extra capital for when they retire may also wish to consider one (or all) of the three options.

The two income portfolios may appeal to investors looking for a growing income from their capital over the long term, and the prospect of capital growth.

However, investors must be able to afford for their income to fall and to lose some of their capital under a worst-case scenario.

Before retired investors consider investing in these portfolios for long-term income and capital growth during their retirement, they would ideally have other secure sources of income to rely on. These portfolios may also appeal to investors approaching retirement who can opt to reinvest their dividends until required. (For the open-ended funds in the model portfolios, this means investors need to choose an ‘accumulation’ share class rather than the ‘income’ share class which we have listed as a default when available.)

How the model portfolios invest 

• View our model portfolios 
• Looking to invest more ethically? View our ethical portfolio

The active income, active growth and ethical growth portfolios mainly invest in actively-managed funds. 

The low-cost income and low-cost growth models are each comprised of index-tracking funds or exchange traded funds (ETFs).

As stated in our methodology, the Super 60 and ACE 40 funds are considered first for the models. However, there is also the option to look outside of the rated funds.

Asset allocation

As stated in our methodology we look at the broad mix of asset classes (different types of investments) that should be represented in the portfolio to give it the best chance of achieving its investment goals. The mix of asset classes for any model portfolio is based on Morningstar’s Target Allocation Indexes. These are created by taking an average of the asset class exposures of all the multi-asset funds with similar equity levels (as defined by Morningstar’s Categories) after any extreme outliers have been removed. The exposure to these asset classes is then rounded and rescaled in order to meet the target equity weight for each index, which is the mid-point of the equity range for each category. The index is rebalanced monthly and refreshed annually.

Current asset allocation (for all portfolios) is based on Morningstar’s UK Adventurous Target Allocation Index created by taking an average of the asset class exposures of all the multi-asset funds in Morningstar’s GBP Allocation 80 + Equity Category:

* with currency risk removed for a sterling-based investor

How to invest?

Investors who want to get close to replicating the performance trajectory of the models would need to make a single, lump sum investment into each portfolio’s constituent, at the suggested percentage allocation. Target allocations for each model’s constituents can be found on the relevant model portfolio page. 

However, for many investors, a regular investment option – monthly or quarterly – is a better solution. Not only does regular investing remove the thorny decision of market timing, it helps to smooth out peaks and troughs in asset prices, reducing the risk of big losses in the process.

Take the first quarter of 2020 as an example, a period which included some of the most severe volatility in stock and bond markets ever witnessed. 

Let’s assume that at the start of 2020 an investor was keen to maximise their full £20,000 Isa allowance for the 2019/20 tax year and had £8,000 left to invest, choosing the constituents of the active growth model. 

According to data from FE Analytics, an investment on 1 January 2020 would have turned into £8,482 by 20 August 2020 – a return of just over 5% so far this year. However, earlier in the year it had also plummeted from £8,000 to £6,200 from 1 January to 23 March, a 22% fall which would likely leave all but the most hardy and experienced investor rueing the timing of their investment. 

Compare this with the experience of the regular investor who started out with a £1,000 investment in each of the portfolio’s constituents on 1 January 2020 and set up a further monthly £1,000 contribution. Their £8,000 investment had become £8,816 by 21 August – almost double the gain and with far less volatility in the process. 

What does this cost? 

Interactive investor has three service plans featuring a standing monthly charge and a monthly trading credit. But because interactive investor does not levy any dealing charges for regular investments, in the example above the only charges payable for the regular investor are 0.5% stamp duty on the portfolio’s investment trust holdings. 

The lump sum investor would need to have paid a dealing charge of between £3.99 and £7.99 (depending on the service plan) for each of the portfolio’s 10 holdings (plus the 0.5% stamp duty on the investment trust holdings).

By and large the performance of most of the models since their launch is highly encouraging, particularly the two growth-focused models featuring actively managed constituents. We would hope that any one of the five can help you reach your financial goals.

Andrew Pitts is an independent consultant for interactive investor and was formerly editor of Money Observer magazine from 1998 until 2015.

Any changes to the ii Model Portfolio constituents and the rationale behind those decisions will be communicated through the Quarterly Investment Outlook.

ii adheres to a strict code of conduct. Members of ii staff may hold shares or units in investments which make up the ii Model Portfolios, which could create a conflict of interest. Any member of staff intending to complete some research about any financial instrument in which they have an interest are required to disclose such interest to ii. We will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, staff involved in the production of the ii Model Portfolios are subject to a personal account dealing restriction. This prevents them from placing a transaction in these portfolios or the underlying specified constituents of each portfolio for five working days before and after an investment is included or amended and made public within the list. This is to avoid personal interests conflicting with the interests of the recipients of the ii Model Portfolio options.