This Christmas parents and grandparents may be gearing up to add some money – or even open – a junior ISA (JISA) for their loved ones.
Setting up children for the future is one of the best presents someone can give – although it may be less exciting than the latest video games console or favourite toy.
Yet last year almost two-thirds (61%) of money put into JISAs in the 2019/20 tax year went into cash accounts. With inflation hitting new highs, it is unlikely that this will keep pace, meaning any money saved could be losing its value over time.
Parents and grandparents starting an account early on can afford to take the risk of stock markets, as over time this has been proven to be the most lucrative option. And with potentially 18 years to invest before the child is eligible to take out the money, time is one thing that they have.
Craig Melling, head of investment at Progeny Asset Management, said: “If thinking about investing for your children’s future, you should follow some simple rules that can help grow wealth over time.
“Think about how to spread risk – portfolio diversification is key. Funds are a great way to diversify and there are many options from FTSE trackers, to emerging markets through to ESG [environmental, social and governance] investments.”
He added that regular investments rather than a lump sum would average out the price paid, while focusing on cost was a “key consideration” when building investment pots.
“If you are investing for children who have long-time horizons, passive or index funds can be an effective low-cost option,” he said.
Emma Wall, head of investment analysis at Hargreaves Lansdown, said she had put her son’s JISA in L&G Future World ESG Developed Index.
The fund invests in almost 1,400 companies across the globe and aims to track the Solactive L&G ESG Developed Markets index, which increases investments in companies that score well on a variety of ESG criteria – from the level of carbon emissions, to the number of women on the board and the quality of disclosure on executive pay.
“It also reduces weighting to companies that score poorly on these measures and won’t invest in tobacco companies, pure coal producers or makers of controversial weapons,” she added.
“It also won’t invest in persistent violators of the UN Global Compact Principles, which is a UN pact on human rights, labour, the environment and anti-corruption.”
L&G Future World ESG Developed Index has not been around for long, but since its launch in April 2019 has retuned 57.5%, beating the average global equity active fund.
Total return of fund vs sector since launch
Source: FE Analytics
However, not all agreed that passive funds were the way to go. Andrew Rees, investment manager at EQ Investors, said Sanlam Artificial Intelligence was his preferred pick for a JISA.
“Contrary to popular belief, artificial intelligence (AI) is not the exclusive domain of technology companies. This fund, managed Chris Ford, is more diversified by sector and region than the typical technology fund,” he said.
“While several fund managers are aware of the technology, they tend not to look for it beyond the heavyweight tech titans. With this fund, we found a manager that is not only an expert tech investor, but has developed proprietary tools to help him find companies deploying AI in their businesses.”
Rees added that Sanlam Artificial Intelligence was in the firm’s ‘Best Ideas’ portfolio, noting that the need for technological innovation and business sense for using AI should keep the theme in vogue for years to come.
“The expectation is the cost savings and/or revenue growth potential that can be achieved when companies apply AI techniques to their businesses will deliver greater growth in the bottom line,” he said.
Tom Sparke, investment manager at GDIM, said parents should look for “potential multi-generational winners” without worrying too much about volatility over the short term.
“I would therefore go for something like the GS India Equity Portfolio. The investment opportunity in India is one of the most substantial in history and we will never see a move on this scale again,” he said.
The $2.4bn (£1.8bn) fund has made investors 370.4% over the past decade, almost double the 204.2% returns made by the MSCI India index.
Total return of fund vs index over 10yrs
Source: FE Analytics
More than a billion people will be moving toward earning, consuming and trading substantially more than they have done before as the country becomes wealthier, encouraging more people into the middle class, he argued.
“The Goldman Sachs fund is our favoured selection in the space as it has strict outperformance targets and a focus on the domestic companies, of various sizes, that will shape the country’s future,” said Sparke.
Laith Khalaf, financial analyst at AJ Bell, agreed that parents could afford to take risk in a JISA, opting for the Aberdeen Standard Investments Global Smaller Companies fund.
“A smaller companies fund could be just the ticket as it has been shown to be a high-growth area of the market over the long term, and one where skilful active managers can really add value too,” he said.
Run by the “veteran” small-cap manager Harry Nimmo, the fund is a “high-conviction portfolio of smaller companies, picked for their good growth prospects and robust finances, so they should be able to weather the occasional storm”, Khalaf said.
The fund uses the manager’s Matrix system designed by Nimmo, which scores and ranks companies based on their ‘quality’, such as earnings growth and valuation.
| Fund | Sector | Fund size | Manager name(s) | OCF |
| ASI Global Smaller Companies | IA Global | £1,906m | Harry Nimmo, Kirsty Desson | 1.05% |
| GS India Equity Portfolio | IA Specialist | £1,785m | Hiren Dasani | 1.06% |
| L&G Future World ESG Developed Index | IA Global | £511m | Index Fund Management Team | 0.25% |
| Sanlam Artificial Intelligence | IA Specialist | £970m | Chris Ford, Tim Day | 0.82% |