Investing for children is a careful balancing act. You want their money to grow as fast as they do, but you don’t want to take so much risk that you jeopardise their financial future
Choose the right funds for your offspring’s Junior Stocks and Shares Isa (Jisa) and you’ll put the foundations in place for their financial future.
Make the wrong calls and you risk wasting the opportunity to help them pay for a car, travel the world or put down a deposit on a house.
Of course, there are no guarantees with any investment, but some funds take significantly more risk in their pursuit of top-drawer returns.
We asked four fund experts to provide suggestions for those wanting lower, medium and higher levels of risk – Darius McDermott, managing director of fund rating firm FundCalibre, Patrick Connolly, chartered financial planner at financial advisory firm Chase de Vere, Gavin Haynes, managing director of investment management firm Whitechurch Securities, and Sarah Coles, personal finance analyst at financial provider Hargreaves Lansdown.
Mr Connolly likes the multi-asset fund Investec Cautious Managed, and rates the experience of its manager. “Alastair Mundy typically invests 50% in assets, such as shares, which he expects to grow, and 50% in assets, including government bonds and cash, to provide protection. He adopts a contrarian approach by making long-term investments in cheap, out-of-favour companies,” he says.
Alastair Gunn and Rhys Petheram’s Jupiter Distribution is Mr Haynes’ lower-risk pick. He comments: “This is a defensively managed fund that aims to provide a sustainable income [that can be reinvested] above cash, and modest long-term growth. The fund invests around 65% in bonds managed by Mr Petheram. The remaining 35% of the portfolio is invested mainly in UK yielding equities and is managed by Mr Gunn. The fund is constructed to allow Jupiter to reclaim 20% tax paid on the income distributions for Isa investors.”
Mrs Coles recommends Newton Real Return, given its diverse investment mandate. She says: “This flexible fund can invest in a number of things, including shares, bonds and cash. It aims to beat the returns available on cash by 4% a year over any five-year period. It also tries to shelter investments as much as possible during more difficult times.”
Mr McDermott rates the long-term focus of Unicorn UK Smaller Companies. “The UK’s smaller companies have fared well despite Brexit worries because we have some excellent small firms, many that are market leaders, in niche markets. This is a high-conviction fund of around 40 stocks. Its manager focuses on company fundamentals and aims to make long-term investments, while avoiding low quality cash-burning companies. It’s small and flexible, with a solid investment process and a highly competent team.”
Mr Haynes’ top pick for medium-risk investors is Evenlode Income. He comments: “For long-term investors this fund invests in a portfolio of high-quality UK dividend stocks. It’s run by Hugh Yarrow, who has managed the fund since launch in 2009. He focuses on total return, but has consistently yielded in excess of 3% and dividends can be reinvested to boost long-term returns.”
Mr Connolly’s top pick is a tracker fund. He says: “This fund provides broad exposure to the UK stock market by tracking the performance of the FTSE All-Share Index. As a passive fund it’s very cheap, with an ongoing charge of just 0.06%. The largest holdings in the fund will always be the companies with the highest market capitalisation listed in the UK, which currently include BP, British American Tobacco, HSBC and Royal Dutch Shell.”
“The Singapore-based managers invest in companies of all shapes and sizes. The core of the fund is high-quality, sustainable growth stocks (minimum 75%), with up to 25% invested in companies more sensitive to the economy,” says Mr McDermott. He adds: “The managers have experience of past crises and are not afraid to go against the grain in their selections.”
Michael Lindsell, Nick Train and James Bullock’s Lindsell Train Global Equity is Mrs Coles’ top pick. She explains: “The fund invests in companies with strong brands and commanding market positions, which have the potential for long-term growth – wherever they are in the world. It’s a very concentrated fund, so your risk is not spread as much as it would be elsewhere, but the focus on big brands and long-term growth reflects the fact that the management team is looking for growth without excessive risk.”
Mr Haynes’s higher-risk choice is Hermes Global Emerging Markets, which boasts a ‘seasoned veteran’ in Gary Greenberg at its helm. Mr Haynes says: “For investors taking a long-term approach, who can accept higher levels of volatility, then emerging markets is a good choice for a Jisa. This fund focuses on high-quality names and has a high-conviction approach. It has outperformed its benchmark index, and with lower volatility, over most time periods.”
Following the same theme, Mr McDermott selects Lazard Emerging Markets. He says: “Emerging markets are higher risk, but children will have a long investment time horizon, so can afford to take it. Parents can also invest monthly, to benefit from pound-cost-averaging in these more volatile markets. Lazard uses its 230-strong team of analysts to identify the global brands of tomorrow in developing regions. The team takes a stock selection-based approach to achieve this, as well as using market volatility created by macroeconomic concerns to time trading opportunities.”
Turning to UK-listed companies, Mr Connolly picks Liontrust UK Smaller Companies: “This is a high-risk fund but one which works well for regular investors with a long-term view. It has achieved an impressive track record by focusing on companies which have a sustainable advantage that is difficult for competitors to replicate. This can be a high recurring income, distribution networks, or intellectual property such as brand and culture.”
Mrs Coles also sticks with a UK fund. She explains: “Marlborough UK Micro-Cap Growth invests in some of the smallest listed companies in the UK, which puts it at the higher-risk end of the spectrum. In the past, the managers have managed to balance strong outperformance with sheltering investors from the worst falls in the toughest times. There are no guarantees that this kind of record will continue in the future, but it underlines the managers’ stock picking expertise.”
* Denotes a Moneywise First 50 fund for beginners investors: see Moneywise.co.uk/first-50-funds.