The Perfect ISA portfolio – still winning?

Long-term 80-20 Investor members may recall my previous quest for the Perfect ISA portfolio. Three years ago I carried out a piece of research with the aim of trying to work out what the Perfect ISA portfolio is (or whether one even existed). The Perfect ISA portfolio had to adhere to the following rules:

• There would be no constraint over which assets could be included or in what proportions they are held
• The portfolio must have made money every tax year since the last market peak back in 2000
• and not lost money
• It had to at least beat a FTSE 100 Index tracker and
• The asset allocation had to remain constant throughout that time

So, in essence, I wanted to find the perfect 'buy and forget' asset allocation. One which would have achieved the above irrespective of the actual funds you'd bought. So to make sure I was only looking at the asset allocation I always used the sector average return for each asset type. My analysis covered 27 sectors (see the original article for the full list).

The number of possible combinations was mind-blowing and it took me two full days to analyse it. I revealed the Perfect ISA Portfolio is split as follows:

• 9% cash
• 71% UK Gilts
• 20% UK Equity Income

Since that time I have revisited the Perfect ISA portfolio each year to see how it has fared in the real world. While the aim of the original research piece was to determine a 'Perfect' asset allocation based on the above rules it was also to determine whether one even existed and to educate 80-20 Investor subscribers on how to go about finding one. One of my aims with 80-20 Investor has always been to spark an inquisitive nature in members and show them how to carry out their own research. It is all about building a hypothesis, working out the best way to test it and then analysing the results. It may well be that you reach a final conclusion. Sometimes it may be that you don't. That is part of the fun and it may surprise you that some of my 80-20 Investor research never sees the light of day because I can't support the hypothesis.

How has the Perfect ISA portfolio fared in 2017/18 tax year

The chart below (click to enlarge) shows how the three component parts of the Perfect ISA portfolio fared this tax year, taking the average return for each sector. The UK Equity Income sector is in red, UK Gilts is in green and cash in blue.

The chart below shows the performance of the overall Perfect ISA portfolio for the current tax year versus the FTSE 100.

It has been a turbulent year for the Perfect ISA portfolio yet despite this even after February's sell-off it was only down just over 2% at its lowest point. UK equities have lagged other developed world equity markets during 2017 but still the average UK equity income fund managed to peak at 8% profit in January before February's sell-off took effect. While just weeks ago it looked almost certain that the Perfect ISA Portfolio might finally fail to make a positive return in a tax year gilts have since rallied strongly, partly a result of renewed concerns over global economic growth. As gilts form the largest part of the Perfect ISA portfolio the portfolio rebounded and now is almost back into positive territory, despite last week's equity market sell-off. This is quite a result. The chart above shows that the Perfect ISA Portfolio is down 0.5% for the current tax year, but at the time of writing, this has since reduced to -0.23%.

The table below shows the tax year returns for the Perfect ISA portfolio as well as those for the FTSE 100. You can see that the Perfect ISA portfolio has made money on paper every tax year since the 2000 market high. Question marks remain over whether it can pull off the same feat this tax year.

Tax Year	FTSE 100 return%	Perfect ISA portfolio return %
2000	-11.13	3.23
2001	-4.11	0.3
2002	-24.52	0.63
2003	21.3	4.69
2004	14.46	6.38
2005	26.34	10.27
2006	9.37	2.47
2007	-3.63	0.86
2008	-29.94	0.02
2009	50.49	7.71
2010	7.95	4.78
2011	-1.74	9.87
2012	13.44	6.83
2013	11.04	0.6
2014	5.73	10.93
2015	-6.35	0.79
2016	23.75	8.44
2017	-2.10%	-0.50%

The Perfect ISA Portfolio research was always about capturing as much of the upside in equity markets while limiting the downside. The Perfect ISA portfolio is not a cash ISA substitute but the original idea was inspired by the intriguing idea of how to beat cash without losing money in a given tax year. When we reviewed the research last year the FTSE 100 had closed the gap on the Perfect ISA Portfolio. While it is a slightly unfair comparison because the FTSE 100 is 100% in equities and the Perfect Portfolio is only 20% in equities at the time I suggested that if we had a market correction then the Perfect ISA Portfolio would likely outperform again.

It turns out that this is exactly what's happened. As shown in the chart below the Perfect ISA portfolio has returned 112% (more than doubling your money) since the year 2000 versus 100% from the FTSE 100. So the Perfect ISA portfolio is in the lead, for now. It will be interesting to see how the Perfect ISA Portfolio will end this current tax year. If it ends up in positive territory then its performance record remains intact. If it fails to end up in positive territory then I may need to review the asset allocation and the associated research to see if it needs tweaking.

But what would have happened if we'd used a momentum strategy like 80-20 Investor to choose the equity funds that the Perfect ISA Portfolio had actually invested in. Don't forget the figures above only assume the average fund return from the respective sectors. Also the figures don't take into account the fact that you can only invest a set amount each year, so you effectively would have dripped your money into the market over time as you used each year's ISA allowance. The result is that since 6/4/2000 you would have invested £179,560 in total if you had used your full annual ISA at the start of each tax year. The result of applying 80-20 Investor to the equity content would then have been

Total Invested	£179,560
Perfect ISA portfolio	£260,631
80-20 Perfect ISA portfolio	£283,854

So you would have been over £23,000 better off with the 80-20 Investor version

So what are the key takeaways from this research

Dynamism is at the heart of 80-20 Investor. By that I mean the ability to review and alter your asset mix and funds to ride the prevailing momentum in markets. However, sometimes investors will want to take a buy and hold approach with some of their money. That's perfectly fine but you can still use 80-20 Investor's research to try and improve returns. 80-20 Investor is not dictatorial and you don't have to just focus on the BOTB funds. The BFBS tables are just as important, in this instance the UK equity income sector shortlist would be particularly relevant.