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The funds that five experts would put in a JISA

02 November 2018

FE Trustnet finds out which funds could make good options for those investing for their children over the long term.

By Gary Jackson,

Editor, FE Trustnet

Funds offering more risky exposure to smaller companies and emerging markets are some of the options open to Junior ISA (JISA) investors given their long time frames, according to investment commentators.

FE Trustnet recently considered how parents can safeguard their children’s financial futures and one thing that everyone agreed on is that it is much better to start saving a nest egg for your kids than to hope the situation will sort itself out.

With this in mind, we have asked around to see which funds parents should consider buying with the arrival of a new child.

All of the experts approached in this article pointed out that 18 years is a very long investment horizon so a more adventurous approach can be taken. This has led to a focus on equities, with nothing in bonds or alternatives.

Below, we find out which funds five experts from the likes of Charles Stanley Direct, Hargreaves Lansdown and Chelsea Financial Services consider to be attractive for JISA investors.

 

Charles Stanley Direct

Charles Stanley Direct pensions & investments analyst Rob Morgan opted for FE Alpha Manager Douglas Brodie’s Edinburgh Worldwide investment trust, which has a focus on disruptive companies with a market cap of less than $5bn at the time of purchase.

The £465.7m trust is part of the same Baillie Gifford global equity range as Scottish Mortgage but invests solely in small-caps, leading to higher levels of volatility with the potential for greater returns. The portfolio tends to be well diversified with more than 100 holdings; it currently has around 40 per cent in technology with another 20 per cent in biotech stocks.

Performance of trust vs sector over 10yrs

 

Source: FE Analytics

“It offers access to fast-growing, entrepreneurial global companies (potential stars of the future – albeit with high risks attached – and is overseen by an established team experienced in this type of growth investing,” Morgan said.

“If you are patient and not worried about short-term volatility – which you shouldn’t be with a Junior ISA – it’s one to tuck away for the long term. Shares do come with a small premium attached at the moment – if you can buy at a discount even better but don’t expect to while growth as a style remains in vogue.”

Edinburgh Worldwide has ongoing charges of 0.87 per cent, is trading on a 3.3 per cent premium to net asset value (NAV) and is 4 per cent geared, according to figures from the Association of Investment Companies.


Hargreaves Lansdown

Laith Khalaf, senior analyst at Hargreaves Lansdown, said the Marlborough UK Micro Cap Growth fund, which is headed up by FE Alpha Manager Giles Hargreave and Guy Feld, is a good option for investors with a longer time frame.

“Smaller companies come with risks attached, but they can also be a source of excellent long-term returns, and are a fertile hunting ground for seasoned active managers like the Marlborough team,” he explained.

Since launch in October 2004, the £1.3bn fund has made a total return of around 660 per cent, which ranks it second out of the 33 IA UK Smaller Companies funds with a long-enough track record.

Performance of fund vs sector since launch

 

Source: FE Analytics

These returns have not come with excessive risk-taking as the fund is in the peer group’s top quartile for volatility and downside risk, leading to some of the sector’s best risk-adjusted returns.

Marlborough UK Micro Cap Growth has an ongoing charges figure (OCF) of 0.79 per cent and is yielding 0.59 per cent.

Other funds that Khalaf considers to be attractive to long-term investors include Stewart Investors Asia Pacific Leaders, which offers exposure to a fast-growing area of the world, and Lindsell Train Global Equity, which is a high-conviction portfolio of around 30 global names with robust finances and solid growth credentials.

 

Tilney Investment Management Services

Over at Tilney Investment Management Services, Jason Hollands said that a ‘one-stop shop’ can be a good idea for long-term portfolios like JISAs as they provide diversified exposure to global equity markets and do not require the end investor to do too much tweaking to positions.

Foreign & Colonial Investment Trust is a solid option, and where my children are invested, which is predominately invested across public markets through over 500 companies but it also has a modest allocation to private equity through a portfolio of limited partnerships,” he said.

Performance of fund vs sector over 10yrs

 

Source: FE Analytics

“One thing to bear in mind is that if you are looking to take a ‘fire and forget’ approach, fund manager changes are highly likely over such a long time period. F&C is delegates regional portfolios to different teams at BMO, the overall manager, but in certain areas they outsource. This approach makes the trust less vulnerable to key manager changes that many.”

Foreign & Colonial also has the distinction of being the oldest investment trust in the world, recently celebrating its 150th birthday. Performance is strong to this day, with the £3.6bn trust outperforming its average IT Global peer over one, three, five and 10 years.

The trust has ongoing charges of 0.52 per cent, trades on a 0.4 per cent premium and is yielding 1.6 per cent. It is 9 per cent geared.

Other options suggested by Hollands are Scottish Mortgage for those willing to take a more high-octane approach with a bias towards growth sectors and RIT Capital Partners, which invests across public and private markets and has allocations to hedge funds, for a more conservative approach.


Chelsea Financial Services

Darius McDermott, managing director of Chelsea Financial Services, thinks that emerging markets are a good focus for JISA investors, given the potential for high returns over the very long term.

With this space, he said India appears to be a promising area thanks to its young and increasingly educated workforce as well as the efforts by pro-business reformist prime minister Narendra Modi to carry out widespread reform of the economy.

Performance of fund vs sector and index over 10yrs

 

Source: FE Analytics

“We like funds such as GS India Equity Portfolio. This fund is run from the region and has a bias to mid-sized companies rather than the large conglomerates that most investors have exposure to,” he said.

“It has a very good long-term track record; like all India funds it’s suffered over the past year but over five or 10 years the outperformance is clear. It also benefits from a good investment team and process.”

The $2bn fund takes a bottom-up approach, concentrating only on identifying the best companies without dealing with any macro inputs, and tends to around 50 per cent of its portfolio in small- and mid-caps. Its largest sector exposure at present is to financials, followed by information technology and consumer discretionary names.

GS India Equity Portfolio has an OCF of 1.09 per cent.

McDermott also considers Stewart Investors Asia Pacific Leaders to be a good JISA holding. In addition, he noted that long investment horizons favour small-caps and highlighted Marlborough UK Micro Cap Growth in this space.

 

Willis Owen

Adrian Lowcock, head of personal investing at Willis Owen, went for concentrate exposure to global stocks and suggested the Lindsell Train Global Equity fund.

The £5.4bn fund has been run by FE Alpha Manager Michael Lindsell since March 2011 with Nick Train (also an FE Alpha Manager) and James Bullock working on it since September 2015.

“The fund is run with a long-term focus on investment performance,” Lowcock said. “The managers look for companies with excellent brands, franchises and unique market positions. Of these, it is those which are conservatively financed and are able to produce a high and stable return on capital which are bought. The fund is highly concentrated with between 25-30 stocks and trading is very infrequent.”

Performance of fund vs sector and index since launch

 

Source: FE Analytics

The fund is in the top three of the IA Global sector over one, three and five years, as well as having the peer group’s second highest Sharpe ratio (a measure of risk-adjusted returns) and its lowest maximum drawdown.

Lindsell Train Global Equity has a 0.74 per cent OCF.

Lowcock also recommended Franklin UK Smaller Companies as a good JISA option, pointing out that the managers are willing to take a contrarian stance with a focus on companies with attractive risk/reward profiles.

He also likes Lazard Emerging Markets, pointing to its long-term approach and strong attention to factors such as cash flow and its impact on the balance sheet as well as top-down risks including macroeconomic; political; and environmental, social, and governance factors.

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