The Key to Diversification of Tax-Efficient Client Portfolios in 2026
Steve Dobson, Head of Investments at GrowthInvest, and presenter of the Alternative Thinking podcast, takes a look at the importance of diversification in what is shaping up to be a landmark year for alternative investments in the UK. He explores how diversification in tax-efficient investing is evolving, and why administration, access and platform integration are now just as important as asset allocation.
Diversification is a key component in investment; it goes hand in hand with the old adage of “don’t put all your eggs in one basket”. Diversification comes into play at different layers of investing, the primary one being asset class – equity, bonds, property or cash. We’re all advised to target a diversified portfolio to optimise the risk and return pay-off. More and more client portfolios now have an allocation to Private Markets, something that has become widely recognised as an important element of any sizeable investment portfolio. That can be anywhere from 0-20%, depending on the sophistication and wealth of the investor. Within Private Markets, there are various asset classes to choose between, the core ones being private equity, private credit, real estate and infrastructure. Under the broad term “private equity”, the very early-stage companies need venture capital, and that’s exactly where the popular UK government-supported schemes like SEIS, EIS and VCTs come in: providing access for retail investors to invest in UK start-up and scale-up companies. The importance of these types of companies to the overall economy is immense, and to encourage investment and reduce the risk, the government provides investors with a variety of generous tax reliefs. In fact, adding this extra risk to the portfolio can actually reduce the risk of the overall portfolio at the same time as increasing potential returns, but that’s for another paper.
Difficult Choices
Diversification doesn’t stop there, of course: pick any one of the tax-efficient wrappers, and there are a whole host of managers out there offering their products and providing convincing reasons why you should advise your clients to invest in them. How on earth do you pick between them? Track record of exits? Sector expertise? Management team’s skillset and experience? Costs? There are lots of different criteria to choose between and advisers should also look to diversify at the manager level for their clients. For the same reason that investors diversify across asset classes, they should also diversify across fund managers themselves after, obviously carrying out suitable due diligence before doing so.
There are numerous examples in history across the financial landscape of a fund manager with a good track record suddenly underperforming peers – and it can happen very suddenly. In a typical Stocks and Shares ISA, it is unlikely you will be invested into a variety of different funds all from the same fund manager; much more likely you will see a range of different managers covering different funds and sectors. The same principle applies in the tax-efficient space, where performance data, other than exits and overall returns over an extended period of many years, can be hard to find. Ask most fund managers, and they would probably support the argument that diversification across different managers is optimal (perhaps as long as they get some of the investment!)
Administrative Challenges
In the main market world of listed and quoted instruments, it is relatively easy to diversify and subsequently track the performance of the individual investments. In the tax-efficient space, it’s not quite that simple. VCTs are listed on the London Stock Exchange, so price information is available there, and many market data vendors will provide historical price and performance information. The GrowthInvest platform links into these and updates on a daily basis. However, EIS and SEIS fund performance is much harder to get any clear information on, other than from the Fund Manager themselves. Most Fund Managers will now offer clients a portal of some sort, from which an adviser can get the information and then put it into a spreadsheet or similar alongside their client’s VCT holdings. So far, so good. But what if the client has properly diversified and has multiple EIS fund holdings across different managers? All of a sudden, the adviser or client has to go to multiple portals to get a clear view of the portfolio, to find tax certificates, or to see what companies have failed. Different portals, passwords, data formats, and terminology all make a clear comparison difficult, even for industry experts.
A Solution Exists
We know anecdotally that the very real administrative burden around tax-efficient investments has been a factor in reducing diversification, or in some instances, stopped a client investing at all. It has long been a problem in the industry and was one of the driving factors in launching GrowthInvest as a specialist platform in the tax-efficient space. The GrowthInvest platform takes care of the heavy lifting for the advisers by connecting directly to the fund managers and their custodians to report on all portfolios, and to standardise and consolidate them in a single, clean client view on the platform. There are numerous reports that can be run directly from the platform to help with tax returns or to review the performance of the fund, and in the case of EIS or SEIS, the ability to drill down to the individual company investments themselves. The platform also connects with all the leading back-office systems. Suddenly, the main admin burden of advising clients with holdings in tax-efficient products goes away.
A look forward
As the tax bill for most individuals continues to go up through the reduction or freezing of allowances, the tax-efficient wrappers of SEIS, EIS and VCT will play a bigger role in the planning discussions. They are not without risk and certainly not for every investor, but for the right investors, they will provide mitigation options for income tax and, in the case of SEIS and EIS, capital gains tax and inheritance tax too. The 2026/2027 tax year sees the initial income tax relief available on VCT investments drop from 30% to 20%, and this is bound to have an impact on the investment levels going into VCTs. We’ve seen an increase in expected fundraising this tax year as a result, but it remains to be seen what will happen going forward. Last time this happened was over 20 years ago, when it caused VCT investment fall by two-thirds, and annual VCT flows took several years to recover. With unspent pensions also falling into an individual’s estate next tax year, advisers can look to EIS to mitigate the inheritance tax burden. We are already seeing enquiries on this exact point, and the GrowthInvest platform and our team are ready to help our clients navigate the new investment landscape.
The next piece of the puzzle
One additional piece of the jigsaw around efficiently and effectively increasing client allocation going into alternative assets is around how to build in traditional private markets funds into retail investor portfolios. There has been an evolution of fund wrappers to make these investments more accessible to private wealth. One of the only comprehensive solutions is via the $1.7 trillion global platform Allfunds, with whom we have now fully integrated our platform. These newer evergreen, semi-liquid structures, with lower minimum investment limits, can be held on the GrowthInvest platform alongside clients’ traditional tax-efficient wrappers, allowing all of the alternative assets to be reported in one place. We expect that many of our advisers and wealth manager clients will be taking advantage of this new option during 2026, and we are delighted to help make diversification in this space as simple as it can be.