Dave Baxter explains what cautious investors need to think about when building an ISA portfolio, and assembles a hypothetical portfolio of 10 funds.
24th March 2026
by Dave Baxter from interactive investor
Building an ISA for different market conditions has felt like a hugely daunting task, even in calmer times.
But with conflict on the agenda, plus the prospect of renewed inflation and disruptive themes such as the rise of artificial intelligence (AI), putting together a portfolio to weather different conditions looks especially trying.
One approach is to avoid making too many knee-jerk reactions and instead focus on having a mix of assets that roughly corresponds to your goals and sense of risk. Defining the latter, and working out a broad asset allocation, is a good first step.
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In this three-part series, we look at what kind of portfolio ISA investors might build in accordance with broad risk appetites. This first piece looks at how an ISA portfolio might shape up for a cautious investor.
The cautious approach
“Cautious” is a very subjective term, but here we look at those investors who largely want to protect their capital without going for too much growth. That might include those in retirement.
The levels could be dialled up and down, but for argument’s sake we land on the idea that a cautious investor would have a very limited 20% of their portfolio in “conventional” equity exposure.
That leaves 40% of the portfolio in bonds and 40% of the assets in so-called alternatives. The bond allocation might prove controversial, and we explore that later.
A few rules of thumb can help you determine how your portfolio might be invested. One approach (and there are many different ones) is to take your age and subtract that number from 100. The resulting number should tell you what percentage of your portfolio to have in equities.
But there are plenty of nuances, and you should generally invest in line with how much time you have to ride out the ups and downs of stock markets, as well as how well you can deal with such volatility psychologically.
Some core options
Investors who want to take a hands-off approach, or to put most of their money into a core holding, do have plenty of options available to them.
Having set their asset allocation, they could always use a tracker fund, or a couple of them, to get a core equity exposure.
When it comes to investing more defensively there are various options.
There’s the iShares Core Global Aggt Bd ETF USD HAcc AGGU
which holds a mixture of “defensive” fixed-income instruments including government and investment-grade corporate bonds. There are also physical gold exchange-traded funds (ETFs).
Investors also have catch-all funds that could house their entire investment or serve as the core of their portfolio, from Vanguard’s (UK-heavy) LifeStrategy offerings to rival franchises from iShares and others, including interactive investor’s very own Managed ISA range.
Vanguard LifeStrategy 20% Eq A Grs Acc and Vanguard LifeStrategy 40% Equity A Acc have the heaviest weightings to bonds and (normally) the most defensive profile.
A set of options with special relevance to cautious investors are, meanwhile, the risk-obsessed “wealth preservation” names Ruffer Investment Company RICA
and Personal Assets Ord PNL0.96%.
Below, we outline the rough asset allocations used by those wealth preservation teams as of late.
| Wealth preservation allocations | |||
| Capital Gearing | Ruffer | Personal Assets | |
| Equities | 24 | 34.6 | 38 |
| Corporate bonds | 13 | 0 | 0 |
| “Nominal” government bonds | 15 | 42.2 | 21 |
| Index-linked government bonds | 45 | 5.3 | 27 |
| Gold, precious metals and related exposure | 1 | 4.8 | 10 |
| Cash | 2 | 2 | 4 |
| Credit and derivative strategies | 0 | 9.4 | 0 |
| Commodities | 0 | 1.6 | 0 |
Source: Recent factsheets. Based on funds’ own definitions.
That all seems simple enough, although there are of course question marks around any kind of “set and forget” fund or portfolio. There is no free lunch. And as our own selection shows, trade-offs have to be made for those trying to build a defensive portfolio.
A cautious portfolio
The hypothetical cautious ISA portfolio is fairly straightforward, although a focus on simplicity does mean it has just 10 holdings and looks relatively concentrated on the surface.
Investors could, if they wished, dial up some of these exposures (for example to a broad bond or gold fund), or add in the likes of a wealth preservation fund on a big weighting, and use some of the more niche names as satellite holdings on lower allocations.
We have opted for a chunky exposure to bonds, at 40%, which allows for pretty diversified allocations here.
Mentioned earlier, the iShares Global Aggregate Bond ETF has around half its portfolio in government debt and a good amount of exposure to corporate bonds with high credit quality ratings.
There’s also the Amundi Core UK Govt Bd ETF Dist GILS
offering exposure to UK government bonds of different maturities, an inflation-linked UK bonds ETF, and the MI TwentyFour AM Dynamic Bond I Acc.
The latter stands out because it delves into more esoteric parts of the bond market (such as mortgage-backed securities) and has achieved a decent yield, and return, from this. It should act as a diversifier against both equities and the other bond exposure, although it does have its own risks.
| A cautious ISA portfolio | ||
| Fund | Weighting (%) | Asset class |
| iShares Core Global Aggt Bd ETF USD HAcc AGGU0.14% | 10 | Bonds |
| Amundi Core UK Govt Bd ETF Dist GILS0.06% | 10 | Bonds |
| MI TwentyFour AM Dynamic Bond I Acc | 10 | Bonds |
| iShares £ Index-Lnkd Gilts ETF GBP Dist INXG0.05% | 10 | Bonds |
| iShares Physical Gold ETC GBP SGLN0.96% | 10 | Commodities |
| Schroder Real Estate Invest Ord SREI1.66% | 10 | Property |
| Janus Henderson Absolute Return I Acc | 10 | Absolute return |
| Invesco Bloomberg Commodity ETF GBP CMOP0.57% | 10 | Commodities |
| F&C Investment Trust Ord FCIT0.08% | 10 | Global |
| iShares MSCI World ex-USA ETF USD Acc GBP XUSE0.49% | 10 | Global |
The inflation question
The hope with a 40% bond allocation is that investors get a decent mix of exposures to an asset class that has had a rocky few years, but where yields are high enough (and valuations low enough) to offer some protection.
Government bonds are in theory meant to perform well when stocks sell off – but any environment involving higher inflation and interest rates alters the dynamic.
We have seen such concerns mount recently, with the yield on the UK 10-year government bond hitting its highest level since 2008 amid conflict in the Middle East.
What to do about such concerns? An index-linked bond fund such as the one in the table tends to perform better than its “nominal” equivalent when inflation expectations rise. But it’s also extremely vulnerable if interest rates rise on the back of that.
Commodities might hold their own in an inflationary environment, and theoretically real assets (such as property, targeted by Schroder Real Estate) should hold up better too. That’s because inflation can limit property development (and boost valuations), while some property leases tend to have inflation linkage baked in.
Also included is Janus Henderson Absolute Return I Acc: while many of its peers have disappointed, this fund has done well to protect investor cash over the years.
The fund has a mixture of long equity positions and shorts, where it bets on a share price falling, and a highly diversified portfolio. It will tend to lag markets in buoyant years, as with its roughly 7% return in 2025, but holds up well when markets struggle.
The fund ended 2022, a year where the MSCI World index lost around 8% in sterling terms, relatively flat.
Back in February, the team noted that it saw long “opportunities” in financials, aerospace and defence stocks and duration-sensitive assets such as utilities, real estate, and high-quality housebuilder stocks, while looking at companies operating in areas such as hotels and leisure as possible short targets thanks to impending cost inflation.
We don’t class it as equity for the purposes of this exercise, although it does boost an investor’s exposure to shares.
Given that the equity exposure in the portfolio is low, we stick with a couple of broad options.
There’s F&C Investment Trust Ord FCIT
which has a highly diversified exposure to the global stock market and doesn’t deviate too wildly from the MSCI World index, but does have some allocation to private markets. The fund has been pretty steady and served as a good core holding.
Like many of its peers, F&C is quite US-heavy, and with that in mind we also include an MSCI World ex-USA fund. That has decent allocations to Japan, the UK and Europe, although our equity exposure doesn’t capture emerging markets.
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