Where in the world to invest a Stocks and Shares ISA?

In three themes, we think the biggest investment opportunities right now are fixed income, UK equity income and China.

All three have been out of favour with a lot of investors over the past year as investors have instead been riding the momentum of US shares.

Of course, we expect most investment portfolios to have a good chunk in the US. But with valuations towards the top end of their historical range in the US, diversifying with other styles, sectors, and countries is now even more important.

With the new tax year having just started, use it as an opportunity to reevaluate and rebalance your portfolio – these three investment themes can help you do just that.

This article isn’t personal advice. Investments, and any income they produce will rise and fall in value, meaning you could get back less than you invest. If you’re not sure if an investment’s right for you, ask for financial advice. Remember, past performance isn’t a guide to the future.

Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

Three investment themes

High-quality corporate and government bonds could be a good addition to help smooth some of the ups and downs of an investment portfolio focused on shares.

We don’t expect the UK, US, or EU central banks to start cutting interest rates until the second half of the year. But bonds will pay an income now and prices have the potential to grow if yields fall when rates do. So, we think there’s currently value in bonds.

Most bonds are offering a significantly more attractive yield now than they were just a couple of years ago. But we think high-quality corporate bonds – bonds issued by companies – offer an attractive yield premium over government bonds. We expect continued volatility in the market though, as economic news and events can spook traders.

We prefer funds run by managers prepared to be nimble and make changes when the time is right, like Stephen Snowden who manages Artemis Corporate Bond. We think the fund is well positioned to take advantage of this market and prefer active management in a market like this – this is where the fund tries to beat the market, instead of track its performance.

The fund has the option to use derivatives and invest in high yield bonds. Both of which add risk if used.

It’s hard to ignore current valuations. The UK stock market is trading at close to a 40% discount to developed market peers, despite offering some great dividends from high-quality businesses.

We like the Artemis Income fund, which invests in companies the managers think can pay a stable and sustainable income over the long run.

The fund is managed by the experienced trio of Adrian Frost, Nick Shenton and Andy Marsh. They look for companies with recurring revenues which they believe will still have consumers, profits, and therefore dividends, in the future.

We also like the City of London investment trust which is looked after by an experienced manager and is currently trading on a discount to NAV. This trust currently holds the record for the longest number of years of increasing its dividend in a row, which reached 57 years during their last financial year.

Both of these funds could benefit if valuations in the UK market close the gap compared to other developed markets. In the meantime, you are getting rewarded for holding the funds through the relatively high dividends they pay.

Both funds take charges from capital, which might mean they are able to pay a higher income, but could reduce the potential for capital growth.

As City of London is an investment trust, investors should be aware that it can trade at a premium or discount to its net asset value. The trust also borrows money to invest (known as gearing) and can use derivatives, both of which add risk.

For those looking for a passive approach (tracker), we like iShares UK Dividend ETF, offering a low-cost option for tracking the performance of the FTSE Dividend UK+ index.

The index offers exposure to 50 of the highest dividend-paying stocks listed in the UK, while still making sure it’s diversified across multiple sectors. The sectors it invests most in are financials, consumer staples and materials. Because it tracks the UK market, this fund will benefit if the market as a whole rises in value.

This ETF has the option to use securities lending, which adds risk.

China might be a controversial call, but bad news is priced in, and we think it’s significantly undervalued even after the recent market rally.

Is there political risk? Yes. Are demographics as supportive of economic growth as they were 40 years ago? Definitely not.

But it’s still a global growth engine and the market is undervalued versus both developed markets and other more popular emerging markets like India.

China’s the world’s second largest economy and unless you prefer a more conservative approach and have a shorter-term investment horizon, around 10% of an 100% shares portfolio could be in China.

Remember though, this isn’t a hard and fast rule and won’t be the same for everyone. It depends on how much risk you’re happy taking and how long you’re investing for – investing should be for at least five years or longer.

Investors can access it through an emerging markets fund, like the low-cost and diversified iShares Emerging Markets Equity Index fund or Vanguard FTSE Emerging Markets ETF.

These funds aim to track the performance of the broader emerging stock market, of which China currently makes up 28%, and will therefore benefit if the Chinese stock market performs well.

Please note that these funds have the option to use derivatives and take part in securities lending, both of which add risk.

Stock selection can be key in this market. So for an active play, we like JPMorgan Emerging Markets Investment Trust.

The trust is managed by experienced investors Austin Forey and John Citron. It provides diverse exposure to countries ranging from China and India, to Taiwan and Brazil. As at the end of February, the fund had just over 18% invested in China, so stood to benefit from a bounce in Chinese shares. As this is an investment trust, investors should be aware that it can trade at a premium or discount to its net asset value.

Emerging markets are generally less well-regulated than the UK and it can sometimes be difficult to buy and sell investments in these areas. Political and economic instability are more likely, making these funds higher risk than those investing in more regulated and developed markets.

These funds can invest in smaller companies, which are more volatile and sometimes more difficult to trade than larger companies.