The royal treatment: our top three Junior ISA fund picks

Darius McDermott 08/09/2017 in Equities

The prospect of having a baby is sure-fire way to focus the minds of any couple. It is a life-changing event, bringing happiness, sleep deprivation and extra financial responsibilities all at the same time.

Prince William and Kate Middleton, the Duchess of Cambridge, announced they are expecting their third baby. While they are fortunate that they don’t have to worry about money, most other expecting couples should think about how they can build a nest egg for their baby.

Here are four ways to save towards your child’s financial future:

1) Open a children’s savings account at a bank or building society with as little as £1. Your child will receive a debit card (with no overdraft facility), which can be a good first step towards learning about saving and spending. Interest rates are very poor though, so your kids won’t learn about the eighth wonder of the world: compounding! More on that below (see point 4)!

2) If you want a better cash rate, you can contribute regularly to a tax-efficient Junior cash ISA. This belongs to the child, so parents will not be able to withdraw money from it. Your child can gain access to the money from the age of 18. Rates are slightly better at 1-2%.

3) Another option is a Junior stocks and shares ISA, which allows you to invest in the stock market on behalf of your child. This means taking on more risk, in the hope of achieving better returns. Just £50 per month over 18 years could generate up to £17,500 (assuming 5% annual growth after charges).

4) Contribute regularly to a Junior SIPP, which is another tax-efficient structure. Again, parents are unable to access the money and the child can only get to it when they are 57 (from 2028). It offers exposure to the stock market and the potential to benefit from compounding returns over the long term.

What do people prefer? Back in November of last year we asked FundCalibre visitors what they thought was the best way to save for a child. The response was overwhelmingly a “Junior stocks & shares ISA” – voted for by 87% of respondents. A Junior SIPP was second (just 7%), with Junior cash ISA and a regular savings account joint third at 3% each. Respondents may have used more than one of the options, but they felt the Junior stocks and shares ISA was the best of the lot.

If you are looking to open up a Junior stocks & shares ISA, here are three funds to cater for different risk profiles…

Lower risk – Premier Multi-Asset Growth & Income

In this category, I would suggest backing a fund that invests predominantly in equities, but has the flexibility to invest in different geographies or assets. This provides diversification and allows the managers to dial down risk when they feel cautious.

Premier Multi-Asset Growth & Income is a good option for lower risk investors. The team, headed by David Hambidge, aims to achieve long-term growth and a moderate level of income. They keep a keen eye on risk and take a truly multi-asset approach to investing. Over the past five years, the fund has returned 84.9% versus 54.6% by the average fund in the Investment Association’s (IA) Mixed Investment 40-85% Shares sector1. Income is paid out twice a year and the multi-manager fund has a historic yield of 2.4% yield2.

Medium risk – Liontrust UK Smaller Companies

If you are happy to take on more risk, UK smaller companies are a good place to start. Over the long term, some investors in this space have been rewarded handsomely. This is because the best smaller companies today can become the large caps of the future.

Liontrust UK Smaller Companies stands out in this category. Managers Anthony Cross and Julian Fosh look for stocks with three of the following characteristics: intellectual property, strong distribution capability and recurring revenues. With this in mind, the companies they hold tend to perform well through different stages of the cycle. Their five-year numbers are a testimony to this: the fund has returned 152.9%, far ahead of an average gain of 116.8% by the IA UK Smaller Companies sector3.

High risk – Baillie Gifford Global Discovery

This fund targets the world’s most innovative, fast-growing companies. It is a great option for parents who are willing to take on more risk in the hope of achieving high returns over the longer term. The team at Baillie Gifford look for businesses that do something different, which may well be loss-making, so long as the team can see future growth potential. For example, Electric car manufacturer Tesla and online supermarket Ocado feature amongst the fund’s largest investments4.

It is an approach that has paid off. Over the past five years, the fund has returned 163.4% – far ahead of 87.2% by the average fund in the IA’s Global sector5.

1Source: FE Analytics, total returns in sterling, 6 September 2012 to 6 September 2017

2Source: Premier Multi-Asset Growth & Income factsheet, August 2017

3Source: FE Analytics, total returns in sterling, 6 September 2012 to 6 September 2017

4Source: Baillie Gifford Global Discovery factsheet, August 2017

5Source: FE Analytics, total returns in sterling, 6 September 2012 to 6 September 2017

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions.Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice.Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.