Investment gifts for the family this Christmas
A pair of socks you don't need, a book you won't read, a woolly jumper that doesn't fit, another box of chocolates: Christmas gifts, however well-intentioned, can get a little predictable. So this year, why not treat your loved ones to a gift that will keep on giving an investment?
Perhaps mum and dad could do with some extra pocket money. "Mum needs a good equity income fund that pays regular dividends so she can pay the bills and still have some money left over to go shopping with," says Andy Parsons, head of investment research at The Share Centre. He recommends the Standard Life UK Equity Income fund, which has returned 38% over three years, as an option unconstrained by a benchmark.
"It is run by Thomas Moore, a young dynamic manager who is proving his credentials," he adds.
A steady Eddy for great aunt Iris? For a relative who really values financial security above all, it is important to find a fund with a defensive strategy that has minimal exposure to cyclical sectors, says Ben Gutteridge, head of fund research at Brewin Dolphin.
For an equity fund, he recommends Trojan Income, which he calls a "healthy compounder". It is underweight cyclical areas, which should help it ride out volatile periods, he explains. "For the nervy investor less able to take risks, there is a certain merit to this type of fund."
If you think Iris would prefer a bond, Gutteridge has another suggestion. He says: "I hate to be consensual, but for feeling secure about income it would be the M&G Corporate Bond fund. We like its cautious approach to stock selection and the fact that it's not playing any sector prone to leverage. The fund is a good choice when capital preservation is paramount alongside steady, long-term compounding."
A £100 investment in Trojan Income, currently yielding just under 4%, would have grown to £145.74 if Iris had reinvested her dividends over the past three years. The same sum invested in the M&G fund, yielding 3.7%, would have grown to £119.70 over three years with dividends reinvested.
A risky flutter for Dad? Parsons likes the Legg Mason Clearbridge US Aggressive Growth fund for an investor who is not risk averse. The fund invests in small and medium-sized US companies, which it believes "stand to benefit from new products or services, technological developments or changes in management'. Parsons concedes that the market is prone to "peaks and troughs" but says, despite that, "the US is the economy leading the global recovery".
For an alternative high-octane choice, Kieran Drake, research analyst at Winterflood Securities, suggests the Biotech Growth Trust, which focuses on a sector with a "compelling secular growth story". He warns that being a niche area, biotech can yield extremely volatile returns, but believes a specialist active manager can add real value.
"[The trust] has an excellent performance record and, while stock specific risk in the sector is high, some of that is mitigated by the diversified portfolio," he says.
Your £100 gift, with any dividends reinvested, would have grown to £166.62 over three years in the Legg Mason fund, or to £161 in the Biotech Growth Trust.
A nest egg for the grandchildren is easy to put together. Investing for a child, whether into a pension or a Junior Isa, is a great opportunity - the long time horizon means you can move up the risk scale and reap rewards from even a small initial investment.
Gutteridge recommends looking to the US when it comes to a Jisa. He says a small-cap fund or the iShares Russell 2000 ETF should do the job. "We like the structural outlook in the US: the recovering housing market, the shale gas and cheap energy story and the improving consumer trends," he says.
Parsons, meanwhile, favours Invesco Perpetual's aptly named Children's Fund. "It is predominantly a UK all-companies fund and it has the big stalwarts of the FTSE 100 in its portfolio, so it offers global expo- sure while giving reassurance to parents and grandparents investing for children." That's why the fund is also a decent choice for an investor looking primarily for stability.
Invesco Perpetual says the fund looks for a balance between "dependable" companies and special situations offering long-term value for shareholders.
You might decide to spread your Christmas gift to your grandchildren over the year by setting up a regular savings plan and paying in a small amount each month. If you'd taken that step with the iShares Russell 2000 ETF for Christmas 2010, and had paid in £30 a month since, your grandchild's fund would now be worth £1,489.63.
Investment trusts tend to outperform unit trusts over the long term, so Drake recommends the Diverse Income Trust, managed by Gervais Williams. The trust is weighted towards UK small- and mid-cap companies and aims to provide healthy, growing dividends. "Performance has been impressive since launch in 2011, with both strong capital growth and income," adds Drake.
If Granny and Grandad could do with an annuity income top-up in retirement, Parsons suggests the Threadneedle Monthly Extra Income fund. It is currently split between equities and bonds, with a heavy bias towards the former - shares account for 74% of the portfolio and bonds just 20%.
Threadneedle says the fund aims to provide income as well as potential for capital growth. It is currently yielding 4.1%.
Alternatively, perhaps you are looking for something for a relative you don't really like - your annoying little brother, superior older sister or the second cousin twice removed you only see once a year at Christmas, when they overdo the sherry and start talking politics.
"Indulge your mean streak and get them an emerging market ETF," Gutteridge suggests. "They are full of dreadful state-owned companies that aren't going to be good for shareholder returns.' Emerging markets have had a particularly tough 2013 and Gutteridge says they are likely to continue to suffer from falling commodity prices, a lack of structural reforms and a dependency on US monetary policy.
The iShares MSCI Emerging Markets ETF would have lost your least favourite relative around 3% over the past three years.
This feature was written for our sister publication Money Observer
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
An Exchange traded fund is a security that tracks an index or commodity but is traded in the same way as a share on an exchange. ETFs allow investors the convenience of purchasing a broad basket of securities in a single transaction, essentially offering the convenience of a stock with the diversification offered by a pooled fund, such as a unit trust. Investors buying an ETF are basically investing in the performance of an underlying bundle of securities, usually those representing a particular index or sector. They have no front or back-end fees but, because they trade as shares, each ETF purchase will be charged a brokerage commission.