Investment doctor: where should I invest an extra £75 a month?
The patient's question:
I have been investing in two funds over the past three to four years: Witan Investment Trust Isa and Fidelity Special Values Investment Trust. These are my only stock market investments, but I have plenty of savings in the bank. My total investments are £150 a month. I would like to invest another £50 to £75 a month. Any suggestions?
Gary Millward, a financial consultant with Alan Steel Asset Management, says: “Given you are only 51 and have funds also lying in deposit, you should be prepared to invest monthly as much as you can afford in order to have the best chance of a decent retirement income.
“We wonder, though, why you don’t consider either saving completely inside an individual savings account (Isa), with no added charges and freedom from capital gains tax (CGT), or leveraging the investment returns by investing within a pension.
“I don’t know your tax position, but even a basic-rate taxpayer receives a 25% uplift on pension contributions. It’s even better for 40% taxpayers - a 67% uplift, and then invested in a fund also free of CGT and inheritance tax.
“Witan and Fidelity Special Values are long-term favourites. We would continue dripping into them, but this is a chance to diversify into other funds. Don’t keep too much excess cash savings – interest rates are going nowhere fast.”
Jason Hollands, the managing director of Tilney Group, says: “Your holdings in Witan* and the Fidelity Special Values investment trusts, both of which invest in equity markets, suggest you are a long-term investor looking for capital growth rather than needing any income from these trusts. Both of these are sound investments.
“Fidelity Special Values invest in the UK market, with a strong bias towards small- and medium-sized companies, while Witan has a global remit but nevertheless has a policy of always having a large chunk in the UK which currently represents 41% of the portfolio.
“Together, this means your investments are predominantly in the UK stock market, so you should focus on upping your international exposure.”
Investment treatment Mr Hollands continues: “One of my firm favourites in the investment trust world is Scottish Mortgage Investment Trust*, which confusingly neither invests specifically in Scotland nor has anything to do with mortgages. It does, however, invest in high-growth companies from across the globe, taking a concentrated and unconstrained ‘go anywhere’ approach.
“Currently, the Scottish Mortgage portfolio has 46% in US companies, 20% in the Eurozone and 18% in Chinese companies, with just 4% in the UK so it would seem to fi t alongside your existing UK-biased existing investments nicely. The top holdings are littered with fast growth companies such as Amazon and Facebook, electric car firm Tesla, Chinese online giants Tencent, Baidu, and Alibaba, and biotech giant Illumina, so the approach is fairly racy.
“An additional bonus is that Scottish Mortgage has very low annual costs of just 0.45%, which is a bargain for such a high performing investment and is considerably lower than the costs on your existing trusts.”
Mr Millward says: “It depends how you feel about the future. If you, like us, think optimists will win through, we’d suggest you let go of the roof and stick the extra into an attacker, such as Nick Train, the fund manager of Lindsell Train Investment Trust.
“Nick was quoted recently saying he saw more opportunities right now than he had seen for a long time. Given his excellent performance numbers this past five and 10 years, we’d say he’s worth listening to.”
Mr Millward says: “If you are pessimistic and would rather hang on to the roof, adding a goalkeeper (safe pair of hands) such as Sebastian Lyon at Personal Assets Trust would make sense, given his defensive strengths over the last 16 years at Troy.” Mr Hollands says:
“An alternative, which is an open-ended fund rather than an investment trust, is FundSmith Equity*, a concentrated global fund that backs quality businesses with strong cash flows, such as PepsiCo, Intercontinental Hotels, and Johnson & Johnson. The fund has a tremendous record and its manager, City big hitter Terry Smith, is confident enough in it to have invested £115 million of his own cash last year alone.”
Moneywise says: Mr Millward’s ‘attacker’ Nick Train also manages an open-ended fund Lindsell Train Global Equity*.
*Fundsmith Equity, Lindsell Train Global Equity, Scottish Mortgage and Witan are all members of the Moneywise First 50 Funds for beginners. For more details, visit our First 50 Funds page.
- Do you have a question for the Investment Doctor? Email firstname.lastname@example.org.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
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.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
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).
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.