Junior ISAs (JISAs) are meant to be long-term savings, with parents putting their cash in higher risk, higher return strategies for their children as they can only be accessed at 18. But as the years go by does the asset allocation need to change?
This is something I am wrestling with at the moment and am currently reviewing my son’s JISA investments now he is nine years old.
My husband and I have amassed £16,000 by investing £100 a month since our son was two. The whole JISA is held in Lindsell Train Global Equity, which has made us a £3,000 investment return.
Total return of fund vs benchmark over 10yrs
Source: FE Analytics
Although we have achieved a decent return, my husband and I feel we should add some more funds to the mix given that the JISA has grown.
However, before diving in, parents (myself included) need to think about how long they have until the money will be handed over and what spread of assets they want to include, according to the experts Trustnet asked.
The first thing to get right is the asset allocation, which will have a much larger impact on returns than fund selection. A key consideration is whether a child will need the money at 18 or whether they might stay invested for longer, for instance to save for a first home.
Either way, nine years is a long enough time to keep most of the JISA in return-seeking equities, but if there are plans to redeem on the child’s 18th birthday (to fund university education, for instance) then a bond ballast might be sensible.
A further option when a child reaches adulthood would be to encash part of his or her JISA each year and use the proceeds to reinvest in a lifetime ISA, which would benefit from a 25% top-up from the government.
Using my son as an example, Emma Wall, head of investment analysis and research at Hargreaves Lansdown, said that if he wishes to keep his JISA invested beyond 18, we could follow Hargreaves Lansdown’s ‘adventurous’ asset allocation, putting 88% in overseas equities and 12% in UK shares.
If he plans to use the money straight away to pay for university, Wall recommended a ‘moderately adventurous’ asset mix instead with a bond component: 16% in investment grade bonds, 4% in other bonds, 66% in overseas stocks and 14% in UK shares.
Laith Khalaf, head of investment analysis at AJ Bell, also suggested focussing on equities for now. “As you get closer to the big 18th birthday, you can perhaps switch towards bonds or multi-asset funds,” he said.
Jason Hollands, managing director at Bestinvest, would keep the majority of the portfolio (70%) in developed market equities, then have 5-10% apiece in credit (via a strategic bond fund) and government bonds, as well as 10% in emerging market equities.
Hollands’ target asset allocation could make the most sense as now appears to be a good time to move into fixed income. With interest rates at their peak, we could lock in the current high yields and then achieve capital gains when central banks start cutting rates.
This is a theory that Wall concurred with. “While it is almost impossible to call the exact top of the rate cycle, there are indicators to suggest that we are at or nearing the peak. This means that bond funds are currently offering a great income – and have the opportunity to offer great capital growth from here, though of course with investing nothing is guaranteed,” she said.
“Bond quality in the index is broadly high too, meaning that fund managers are able to find bonds with good credit ratings for a good price – reducing the risk of defaults if the recession does appear next year.”
Edward Allen, private client investment manager at Tyndall Investment Management, was more circumspect about allocating to bonds. “Buying a short-term bond fund would only make sense if you sniff the opportunity to invest in risk at a later date,” he said.
Khalaf agreed that bonds are not essential at this juncture, especially for someone in my situation who intends to drip feed £100 a month into the JISA. “Even if there’s a market fall in the next few years, you’ve got fresh money going in and buying at lower prices,” he explained.
“If you’re more cautious and can’t stomach the ups and downs of full stock market exposure, then of course you can add some bonds for ballast and diversification now.” He recommended looking for bond funds which hedge back to sterling to avoid currency risk.
“Alternatively, you might select some conservative multi-asset funds which invest in a mix of shares, bonds cash and alternatives so you don’t need to worry about asset allocation,” Khalaf added.
Another option would be to outsource asset allocation decisions completely to a model portfolio. These are widely available on platforms and are usually organised by risk appetite. Some of them can be very cheap, too; Bestinvest’s ‘smart’ range which uses low-cost ETFs and passive funds only charges about 0.3%.
I want to pick my own funds, however, as I have the luxury of spending my working days interviewing fund managers. As such, I asked my panel of experts to suggest some funds to add into Harry’s JISA and will reveal their top picks tomorrow.