Investing for children and grandchildren is a great way to build a nest egg, and with a long time frame there’s plenty of time to ride out the inevitable ebbs and flows of investment markets.
Junior ISAs, or JISAs, are inherently very long term because typically money cannot be withdrawn until the child reaches 18, and a child can choose to keep the money invested thereafter.
A Junior SIPP has an even longer time frame, currently 55 (rising to 57 in 2028, and it will in all likelihood increase further in future years). The annual pension contribution limit for non-earners is £3,600 per annum, so you could save up to £2,880 for a child’s retirement, to which the taxman would add £720, with the money being locked up until age 55.
“I invested in my kids’ SIPPs [self-invested personal pensions] when they were born – so a 55-year time horizon and 20% basic tax relief,” says Matthew Cheek, managing director of Casterbridge Wealth. He adds: “When I’m long gone, they will have a nice gift from their pensions.”
The general rule of thumb is that the younger you are, the more risk you can afford to take and the greater potential return you stand to gain.
“Investing for children allows time for themes and underlying growth to come to fruition – an approach that won’t necessarily be right for older investors,” says Kamal Warraich, head of equity fund research at Canaccord Genuity Wealth Management.
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The perfect number of funds in a portfolio for a child depends on several factors, including the investor’s investment strategy and time commitment.
Myron Jobson, senior personal finance analyst at interactive investor, says: “If you prefer a hands-on approach, managing a portfolio with a few funds might be more engaging and easier to keep track of. Whatever your approach, diversification is key.”
A multi-asset or multi-manager fund could be a good choice for less-experienced investors or those who don’t have enough starting capital to build a diversified portfolio themselves. These funds are managed by professionals with expertise in asset allocation, making it easier for investors to access a well-balanced portfolio without needing to actively manage it themselves.
“The alternative is to pick a number of funds that align to your risk profile and investment horizon, or you can do both – invest in a fund with a broader remit and have satellite positions of more focused investments,” adds Jobson.
So, in which funds and investment trusts are the professionals investing for the children in their lives?
Back in the noughties, when his nieces (now aged 23 and 20) started school, James Carthew, head of investment companies at QuotedData, began saving regularly on their behalf, all of which was invested in multi-manager proposition Alliance Trust (LSE:ATST).
He says: “My reasoning was that it offers broad exposure to global equity markets, without taking on too much risk. They both got a nice lump sum when they started university, which to be fair would have been bigger had I been reinvesting the dividends – always a good idea.”
Ben Yearsley, investment director at Plymouth-based Shore Financial Planning, has been investing in his 16-year-old niece’s JISA since she was born. One long-standing holding is multi-asset fund Trojan, which aims to at least match inflation over time.
Yearsley explains: “Inflation is one of the biggest destructors of capital and one of the biggest barriers to growing wealth. The other reason why this is very suitable for kids is that the managers take care of the asset allocation – protecting capital or adding growth assets when they think the time is right.”
Vanguard LifeStrategy 80% Equity
When investing for children, Tom Munro, a financial planner at McHardy Private Wealth, favours a long-term buy and hold strategy. One of the core funds in his 26-year-old daughter’s savings plan is Vanguard LifeStrategy 80% Equity, which invests 80%/20% in equities/bonds for a low annual charge of 0.22%.
“The passive portfolio is made up of 17 funds from the Vanguard stable and has averaged sparkling annual returns of just shy of 12% since launch in 2011, when I first bought into the passive concept, against a sector average of 6.7%,” says Munro.
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Warraich at Canaccord Genuity has a son and a daughter, aged eight and four, and has plumped for small and mid-caps for them, an area that is well suited to investors with a higher appetite for risk.
One of the investment trusts he holds for his kids is Edinburgh Worldwide (LSE:EWI). Run by Baillie Gifford, it invests globally in a range of initially immature entrepreneurial companies with very long-term growth potential. Its largest holding is Space Exploration Technologies, commonly known as SpaceX, which designs and manufactures rockets and advanced spacecrafts.
Henderson Smaller Companies
When his kids (now 14 and 13) were born, Cheek at Casterbridge was looking for 100% equity funds that tap into future mega-trends. One holding in their SIPP is the Henderson Smaller Companies (LSE:HSL) investment trust, one of interactive investor’s Super 60 investment ideas.
“It underpins the thesis of capital markets in that those small-cap stocks are likely to become the giants of the future. It’s less volatile than you might imagine even with the flexibility of leverage to turbocharge bull markets – just what is needed for a very long-term investment,” says Cheek.
Janus Henderson Global Technology Leaders
Another fund that plays to Cheek’s investment thesis of investing in tomorrow’s winners is Janus Henderson Global Technology Leaders.
He says: “I wanted lock and leave concentrated holdings to buy and hold over the very long term unless anything materially changed with the portfolios.
“At Henderson, I’ve been really impressed by co-manager Richard Clode’s ability to invest in the noisy tech sector, while avoiding the hype cycle and not overpaying for expensive tech giants.”
Nick Wood, head of fund research at Quilter Cheviot, has two children aged two and six. For them, he owns Schroder Recovery, which owns out-of-favour equities primarily in the UK but can allocate up to 20% overseas.
“For many, long-term investing involves seeking high-growth businesses or smaller companies, but there’s equally a place for a manager who’s willing to seek the most undervalued assets with a long-term mindset,” he says.
FSSA Asia Focus
Turning to Asia now, and Yearsley has favoured the quality-growth approach of FSSA Asia Focus since starting his niece’s JISA.
“Sectors like tech can go in and out if fashion, but if I had to pick one area when a child is born to invest it’s emerging markets and Asia due to the long-run growth potential of the region,” he says
Polar Capital Global Insurance
Rounding off the selections are a couple of more niche plays. One holding that Yearsley’s niece owns is Polar Capital Global Insurance.
He explains: “This is an unusual one. Some might say it’s the most boring fund around, but I look at it as nailed-on growth over the long term. It will never give you 50% annual returns, but as and when it does have a negative year it has played catch-up over the following few. There’s nothing wrong with steady accumulation of returns from stocks very unlikely to feature in other portfolios.”
Candriam Equities L Oncology Impact
Last but not least, Ravenscroft fund manager Shannon Lancaster bought at the start of 2022 Candriam Equities L Oncology Impact for her 10-year-old daughter. The fund invests globally in companies that strive for a broad advance in improvements in the research, diagnosis, profiling and treatment of all cancers.
“It’s truly unique because it provides an opportunity to invest in the fight against cancer – the number two cause of death worldwide,” she says.
One to watch, then, for those who want to build a nest egg for a child and make the world they will inherit a better place.
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