Growing capital for kids
What's the best way to save for children? Follow these steps to learn about successful investing.
Schools and universities returning is a prime time to consider how best to save for children. These ten steps can help you learn the ABC of successful investing.
1. Stock market exposure
Many parents and grandparents want to help younger members of the family financially – whether to help fund an education, wedding or deposit for a first home.
Junior ISAs shelter capital and income from tax and is the best place to start for those comfortable with the assets being in the child’s name and inaccessible until age 18. If you are looking to save for private school fees, access will be required earlier. You could consider earmarking some of your own ISA allowance for this purpose.
Whatever type of account you choose, the investments held within it are of critical importance.
“Cash isn’t right for long-term savings as the real value is gnawed away by inflation, but disappointingly most junior ISAs land up in cash,” said Jason Hollands, managing director of business development at Tilney Investment Management Services.
“For children with a medium to longer-term horizon, it will be much more appropriate to put savings to work in the stock market. While returns can be volatile on a short-term basis, as we’ve certainly seen this year, these downs and ups are smoothed out over the longer term.”
2. Global spread
Those new to investing can naturally be wary of committing money to the stock market. “This is despite the way that a carefully selected basket of stocks and shares can grow in real terms – faster than the rate of inflation – over the longer term,” said John Newlands, founder of Newlands Research. “The answer is to ensure broad portfolio diversification to minimise the risk of painful loss from a single failure.”
Many first-time or less experienced investors default to their ‘home’ market and select a UK-focused fund. While you might draw comfort from recognising the company names in the portfolio, it also significantly reduces your opportunity set.
“The world really is your oyster, so I’d always urge parents and grandparents in these circumstances to select investments with a global remit,” said Hollands. “Investment trusts have a long heritage of providing a one-stop-shop approach that enables small investors to tap into such opportunities and there are many great trusts that provide international diversification at low cost that would make an ideal choice for children’s savings.”
3. Long-term focus
For those who want to build long-term savings there are few better places to start than investment trusts.
“Investment trusts have been successful investment vehicles since the 19th century, and have always adapted well to new circumstances,” said David Liddell, a director of online advisory investment service IpsoFacto Investor.
Particularly useful features for long-term investors include the closed-end structure and gearing. “Sensible use of borrowing means that the portfolio can gain more than the underlying market when markets increase in value, as usually happens over the long term,” said Liddell.
“The closed-end structure also allows managers to back their ideas over the long term without having to worry about money flowing in or out.”
4. Active management
While index-trackers offer a degree of diversification at low cost, by their very definition they cannot beat the stock market after fees.
Managers of active funds can. “Many investment trusts can point to long-term track records of beating indices and equivalent open-ended funds,” said James Carthew, head of research at QuotedData.
He saved £100 per quarter into Alliance Trust for each of his nieces over a nine-year period and more than doubled his money – significantly outperforming the stock market.
“A trust such as Alliance Trust ticks all the boxes,” he said. “It hides its light under a bushel on its factsheets, which only give five-year returns. Over 20 years, it has returned 217% against 182% for the MSCI World index*.”
5. Risk management
Traditional passive funds blindly buy the constituents of an index with no regard for their valuation or whether they look like a good investment. This tends to make them overly concentrated in certain sectors or investment styles.
For example, the UK stock market is heavily weighted to banks and oil stocks – out-of-favour areas that are the domain of ‘value’ managers just now. The US market has a wealth of technology names – popular with managers who adopt a ‘growth’ style.
Active managers have the benefit of being able to avoid such stock market concentration. Well-diversified global funds boast a spread of assets not only across geographies, but across sectors and styles to manage the risk of being in the wrong place at the wrong time.
6. Range of experts
A few global investment trusts harness the expertise of a range of professional investors.
Alliance Trust’s investment manager, Willis Towers Watson, has appointed several stock pickers with different styles. Each ignore the benchmark and only buy a small number of stocks in which they have strong conviction. Investors get the benefit of both highly focused stock picking to increase potential outperformance versus the benchmark and manager diversification to reduce risk and volatility.
In this regard, it removes the hassle of attempting to be your own investment manager. “For a first-time investor, a global growth trust such as Alliance is a sensible choice,” said Gavin Haynes, co-founder of Fairview Investing.
“It follows a multi-manager approach, where the trust outsources different parts of the portfolio to experts in that particular area… effectively providing investors with a professionally constructed diversified portfolio in one investment vehicle.”
7. Competitive fees
While multi-manager funds used to be expensive compared to single manager funds, cost have come down significantly in recent years. Alliance Trust has an annual ongoing charge of 0.65% or less (0.62% in 2019), while its closest competitor Witan charges 0.87%, which includes a performance fee.
“As a core global equity portfolio, it [Alliance] is providing professional investment management for the ordinary investor at a very reasonable cost,” said Liddell. “A long-term approach, professional management, the possibility of enhanced returns and value for money all make investment trusts such as Alliance attractive for those beginning on the investment journey.”
8. Low entry level
The earlier you start saving, the better – giving the investment longer to grow. If you cannot afford to put a large sum to work, don’t worry; investing small amounts regularly is one of the best ways to invest. This spreads risk and compounds long-term growth of capital and dividends (opt to automatically reinvest these to supercharge your returns).
“Great comfort can be drawn by trickling the money in using a monthly savings plan – one of the best ways around to accumulate a spending pot without trying too hard,” said Newlands.
If you invested £50 per month in the average global fund or global investment trust over 18 years your investment would have grown by 316% and 495% respectively by the end of July 2020, data from interactive investor shows*.
Saving regularly over a long period of time reduces the temptation to try to time your investments – something that is notoriously difficult. The importance thing for Carthew is to pick an investment that you have faith will be around when you want the investment to mature.
“Choose a vehicle that has been serving its shareholders at low cost for decades, and indeed for some investment trusts, such as Alliance, since the nineteenth century,” said Newlands, pointing to the trust’s inception back in 1888.
10. Strong core holding
A global equity fund is an ideal first investment for a young person’s portfolio – perhaps the only equity fund they will need. It is also a solid foundation for those who want to continue their investment journey as adults.
Child trust funds (CTF) started to mature on 1 September, as the first children to benefit from the scheme turned 18. Around 800,000 will mature each year, giving young adults access to £700 million this tax year and a total of £7.5 billion over the next decade.
When deciding how to invest their money, caution is the most prominent emotion felt by young investors (21%), while one in five young investors also report stress (20%) and nerves (20%) when deciding which companies or assets to buy, according to the Share Centre.
“The more you talk to your children about their finances, and the more they understand the benefits of investment, the better equipped they will be to make the right decision,” said Sarah Coles, a personal finance analyst at Hargreaves Lansdown.
*Past performance is not an indicator of future returns.