Are you an investing optimist or a realist? The finest funding trusts to your Isa relying in your view

The hare and the tortoise is an interesting parable, with a lot to teach us about investing.

The hare would have won the race if he hadn’t fallen asleep in the sun, so is the message really that ‘slow and steady wins the race’?

Or perhaps the real message is that complacency is fatal: to be successful, you need to stay focused.

There are many ways to win, but as soon as you rest on your laurels it is over.

So it is with the markets. Investors can take a cautious approach, paying attention to not losing money in down markets, or try to maximise returns whatever the cost in volatility. Either strategy is perfectly valid, but requires some thought and discipline to pull off.

As investors keen to stay focused think about allocating their Isa funds early now the new tax year has arrived, Kepler analysts Thomas McMahon and William Heathcoat Amory weigh up some options on both sides of the coin.

Optimists: Swing for the fences

With markets in the red thanks to the war in the Middle East, investors could be excused for eyeing up cash accounts and those sweet, sweet government guarantees. 

However, the best time to make investments is usually when you least want to.

Worries about potential losses might be on your mind more than usual, but ideally you would have made any defensive investments before a market sell-off, not during.

With markets now significantly cheaper than they were a few weeks ago, being biased towards optimism could pay off over any long-term investment horizon.

Nowhere is this more true than in the investment trust sector, where widening discounts often offer an extra layer of value in times of crisis.

This offers investors a chance to buy assets below their market value when their current owners are panicking. 

The state of the current crisis in the Middle East is changing from day to day, but at the time of writing some interesting value has emerged in the sector.

Small cap stocks are an area that some investors may deem risky vs blue-chip, household name FTSE 100 companies, but they have potential for significant upside.

One trust which rarely traded on a discount in the year before the outbreak of war is Rockwood Strategic (RKW). 

RKW’s manager, Richard Staveley, invests in the smallest companies on the UK stock market, and the investment case for these companies usually isn’t strongly dependent on a healthy UK economy.

Of course, this will help, but modestly lower growth in the UK, thanks to higher energy prices, shouldn’t be lethal for the bulk of the portfolio. 

Generally, Richard is looking for deeply discounted assets where there is the potential for a turnaround, often with a change of management or evolution of strategy.

To catalyse this ‘self-help’, Harwood regularly proposes expert candidates to enhance Boards or, with shareholder support, takes a Board position themselves. 

The fund has more than doubled investors’ money over the past five years, and its success has led to it frequently trading on a premium and raising new equity.

However, the discount is around 4.5 per cent at the time of writing, an opportunity which I think might not last long.

Another small-cap focused trust which looks good value is Aberdeen Asia Focus (AAS). 

It was a hero a generation ago, but about 10 years ago things that worked for it stopped working. 

There have been management changes over the period, and the market environment has changed, but over the past three years the trust has really come back into form under manager Gabriel Sacks.

Last year was particularly good as smaller companies in Asia finally started to outperform. 

With the sensitivity of many Asian markets and economies to global trade, the shares have taken a hit in the aftermath of the outbreak of war, and the discount, which was steadily narrowing into mid-single digits, has widened back out a little once more. It could be a real beneficiary of any relief rally when hostilities end.

Fidelity Emerging Markets (FEML) also looks good value, with the discount having widened out to 10 per cent at the time of writing. 

It is another to have had an excellent 2025, the NAV up 60 per cent in the year to the end of January and the share price 71 per cent thanks to a narrowing discount, which has now partly reversed. 

Emerging markets have really been out of favour for some time, and FEML has benefitted from a big rebound in China, while long and short positions (short meaning those which pay off when share prices fall) have added extra returns above the market gains.

Entering the year, there was growing noise about a recovery in emerging markets. While the current conflict has led to some investors dialing down risk, I think when it concludes the same factors should come back into play: great earnings growth, cheap valuations, and investors looking to diversify away from the US.

Realists: Plod to the finish line

Stock markets everywhere have had three consecutive years of strong, double-digit returns. 

Even the much-maligned FTSE managed to outperform its US cousin last year, taking it back to its highs.

Stock markets are always cyclical, riding high on optimism before falling back for mainly unpredictable reasons.

The hype around AI may be justified, a once in a generation change. But that doesn’t stop share prices over running; the dot.com boom and bust is evidence of that. 

So having had a strong run within equity portfolios everywhere, it must make sense to take a breath and think about opportunities that are perhaps not quite as ambitious, but which have a decent level of downside protection. After all, nothing lasts forever.

Some investment trusts and asset classes offer these sorts of downside protection characteristics, whilst others have an objective to provide diversification from the main drivers of stock market returns.

In the former camp, we would highlight BH Macro (BHMG), which invests into the Brevan Howard Master Fund, the flagship hedge fund of Brevan Howard. 

Since BHMG IPO’d in March 2007, it has delivered equity-like NAV total returns of 8.4 per cent (to end January 2026) with significantly lower NAV-based volatility than equities of 8.1 per cent, though BHMG investors are of course subject to additional share price volatility too, given movement in the share price to NAV discount (or premium) over time.

In terms of offering downside protection, we only have to look back at the track record to see that time and time again, BHMG has typically delivered strong positive NAV returns at times when equity markets are under stress and falling in value.

This is a result of the way the managers invest capital, but also because of their tightly controlled risk management framework. 

The result is that the returns from the fund may demonstrate what traders call ‘convexity’. In simple terms, this means that when ‘they get it wrong’ the downside risk of the NAV should be limited, whilst if they get trades correct, the upside could be up to several times the magnitude of the downside.

BH Macro’s current discount to NAV of 6.2 per cent at time of writing also represents an attractive entry point in our opinion. 

Whilst the discount has reduced over the past year, largely as a result of sustained share buybacks from the Board, it is still wider than its five-year average. 

BHMG looks like a compelling component of a broad equity portfolio, particularly for those investors wishing to take some risk off the table.

Another trust which may offer good downside protection is Ruffer Investment Company (RICA). 

It has historically shown itself to be a valuable investment during past crises, and its unconventional positioning, based on deep thinking about the real drivers of the economy and of markets, could come into its own if the current war in Iran drags on and further impacts equity and bond markets.

RICA aims to deliver positive returns in all environments. Over 2025, the trust delivered a creditable double-digit NAV return, but interestingly was able to generate positive returns when markets rallied as well as when they fell in the ‘tariff-tantrum’ following Liberation Day.

The tools it invests in might look unfamiliar to the average investors – derivative strategies targeting equity markets, credit spreads and volatility are an important component of the portfolio – but it is this unconventional asset allocation that has supported good performance in tricky periods for the wider market.

Prior to the war in Iran breaking out, many investors may have been lured back into bonds for protection and diversification, with a rate-cutting cycle apparently entrenched. 

However, inflation is proving remarkably persistent: strong commodity prices last year would presage inflation this year, notwithstanding the energy shock from the war in the Middle East.

Reshoring, electrification and AI infrastructure construction are all trends supporting high demand for raw materials, while political pressures to raise wages remain strong.

We don’t think bonds will protect when equity markets sell off as they have done in the past, and Ruffer could be a good alternative to hold to serve that function in a portfolio.

If the conflict persists and market conditions deteriorate, the protective strategies could deliver meaningful positive returns, while the portfolio also has exposure to assets that should participate in any relief rally on a ceasefire.

In terms of pure equity market diversification, BlackRock World Mining (BRWM) could offer an interesting exposure. 

It has had a volatile year so far, having experienced a blisteringly strong 2025 with a NAV total return of 74 per cent. 

Gold and silver miners soared over the year, and were a major factor behind the strong results, with the managers’ decision to increase exposure in 2024 paying off.

Copper prices were also strong over the year, benefitting another major theme in BRWM’s portfolio. 

The construction of AI data centres, the reshoring of industrial production and the energy transition are all themes supporting copper demand and miners of the metal. Overall, the managers expect global spend on infrastructure to be c. three times the amount it was over the past fifteen years in the next fifteen.

In the short term, there has been some volatility in commodity prices due to the war in the Middle East. 

Higher fuel prices and higher transportation costs will weigh on miners’ profitability if they are sustained, and if the world is tipped into recession this will not be good for miners, which are highly cyclical.

A lot is still uncertain regarding the war, but we think that if it proves to be short-lived then this could end up being a good dip to buy. 

BRWM remains a highly attractive way to take diversified commodity exposure. It’s nimbler than the diversified miners themselves and uses the advantages of the closed-ended structure to make the most of active management, utilising gearing, options and unlisted investments to offer a truly diversified commodities and mining portfolio.