Many ISA investors suffer from home bias. This comes at a high price. There are many more profitable opportunities outside the UK. We look at how to build an ISA based around these global opportunities (other than just sticking a pin in the paper!)

Considerable Extra Profits vs UK

We have built a Global ISA portfolio by selecting the 3 best funds invested outside of the UK using momentum investing (see recap below). If you had stuck with this process from 1999 you would now have built an ISA pot of 329,752 from your total ISA contributions of 135,880, a profit of 193,872.

This growth compares very favourably with the alternative of investing largely or solely into the UK. The detail is in Table 1, and here are the highlights, with the Global ISA Portfolio generating:

• Extra profit of 105,222 compared to just investing in the FTSE 100
• Put another way, that is more than twice the profits from a UK index tracker
• Extra profit of 90,291 compared to investing into the UK All Companies sector average
• And with no additional extra risk/volatility

As you can see in the latter numbers, by casting the net further afield investors embrace substantially superior growth opportunities.

And by using a momentum strategy to select funds (see Recap below) you take the guesswork out of selecting the most opportune funds.

Now here is a bit more detail on the fund sectors applicable, and the journey since 1999.

The process is such that you review your fund choices every 6 months, in January and July. The 3 new global funds are chosen from mainstream sectors i.e. Europe excl. UK, European Smaller, North American and North American Smaller, Japan, and Asia excl. Japan.

By mainstream we mean excluding higher risk sectors such as China, or funds in the Specialist sector, which might focus on India for example.

Since 1999 this range of sectors has created some very profitable opportunities.

The Journey To Date

In July 1999 you would have held 3 Japan focussed funds (Legg Mason Japan, Fidelity Japan Smaller Companies and JPM Japan ). By July 2003 you would have moved to European funds (Artemis European Growth, M&G European Smaller and Baring Europe Select ).

In January 2015 you would have just switched out of a European and Asian fund and into Fidelity American Special Situations . F&C North American and CF Westchester Sterling .

This is the process, momentum investing, in action. But there is one other vital ingredient.

Recipe For Success?

Remember, there are two main attributes for a successful investor:

• Discipline. You must ensure you use your annual ISA allowance religiously. It is too easy to be put off by markets still racked with uncertainty
• Process. You need a clear idea of how you will maximise your returns, a process and the discipline (that again!) to apply it consistently, year to year.

It doesnt matter how disciplined you are about making your ISA contribution if you dont have a repeatable process, and apply it consistently.

The problem with most strategies is that they are profitable only with the benefit of hindsight, and arent repeatable. The next time someone recommends a fund to you, or rates it 5 Star or whatever, ask them about their process and the evidence of its success.

Recap On Momentum

What is momentum investing? With this portfolio you buy the three top performing funds over the last 6 months, taking into account ALL the global fund sectors mentioned above. Then in 6 months you repeat the process — you sell the funds you hold, and buy the three top performing funds of the most recent 6 months.

Thats it, momentum at its simplest.

George Soros is the most famous (and successful!) exponent. The first research was back in 1937 and there have been hundreds of academic papers into momentum, most confirming that it continues to work.

The most recent paper was by the famous academic trio of Dimson, March and Staunton of London Business School, who are authors of the indispensable Credit Suisse Global Investment Returns Yearbook. They concluded:

• There is extensive evidence, across time and markets, that momentum profits have been large and pervasive
• we now know that momentum has in fact been a feature of the market for a very long time. it has been remarkably persistent

ACTION FOR INVESTORS

• Check your ISA. Is it only invested in UK plc? If so, now may be the time to diversify.
• If you are new to momentum investing take a look at our Dynamic Fund Selection research here .
• Review your funds to make sure you are invested in the best.
• Its ISA season! Stuck for portfolio ideas? Have a look at our ISA section .

FURTHER READING:

Table 1: Global ISA Portfolio (1/7/9928/2/15)