Statistics issued in September by minister Ed Balls showed in the first year of child trust funds (CTFs), 74% of accounts opened were stakeholder and 22% were held in cash accounts.
The remaining 4% was held in non-stakeholder CTF funds, which include actively managed funds and investment trusts. However while CTFs have only been going a year, investments trust providers have been advertising their sector as an appropriate home for children savings for a lot longer.
Witan, F&C and Baillie Gifford are three groups which have such schemes. Witan launched its scheme, called Jump, in 1999 and it says it now has over 20,000 users. While Jump provides investor’s access to one trust, the £1.37bn Witan trust, the F&C scheme provides access to its stable of 14 while the Baillie Gifford scheme offers a choice of eight portfolios. F&C also has its own CTF, which also invests in its 14 trusts.
According to James Budden, marketing director at Witan, the advantage of saving through investment trusts is their low total expense ratios (TERs), especially of the global generalist trusts. He argues that compared with funds in the open-ended sector, which have TERs of around 1.5%, he says investment trusts TERs are closer to 0.5%.
Charles Cade, head of research at WINS Investment Trusts, the investment trust research specialist, says that when saving over a long period of time this difference in fees can make an important difference. In addition, he says the diversification offered by the global generalist trusts makes them appropriate saving vehicles does make them appropriate funds for children’s saving schemes.
“Investors are not buying these funds for sharp moves upwards, they are looking for growth over a long period of time,” he says.
Indeed, according to data from Financial Express Analytics the AIC Global Growth investment trust sector has outperformed the FTSE All Share over three, five and 10 years to September 28, 2006. Compared with the FTSE All Share, which has returned 63.51%, 53.33% and 110.63%, over three, five and 10 years respectively, the Global Growth sector has returned 67.98%, 70.72% and 119.16%.
These numbers are well in excess of those made by building society accounts, where Budden notes a number of CTFs are invested in. He says that over five years to the end of August, the Building Society Index has returned 12.2%.
Jason Hollands, head of communications at F&C, says the figures released by Ed Balls show that three-quarters of parents are “sleepwalking into funds”, which he argues do not necessarily offer best value for money. He says: “Much has been made of the fact that Stakeholder CTFs have their charges capped at 1.5% per annum. This may give parents the impression that this is the best value-for-money option. However this may not be the case.”
Hollands notes that a quick glance at a typical Stakeholder CTF shows that nearly all providers charge the maximum 1.5% allowable under the rules, when in fact many of the funds in the stakeholder are either index trackers or have a lot invested in fixed income. “Normally one of the main benefits of index funds are their low fees but 1.5% is actually high for such products,” he says.
The reason why providers charge higher than normal fees for such funds, Hollands explains, is that it is expensive to administer small amounts of business, given the fixed costs involved. He argues while the typical provider will set a minimum amount of £1,000 lump sum or £50 per month, a CTF account needs to be accessible for a £250 investment. “The point here isn’t that providers are lining their pockets, but that the stakeholder badge is steering parents into these funds when the reality is that better – and indeed lower cost – options may be available elsewhere.”
Mark Dampier, head of research at Hargreaves Lansdown, however says that while investment trust charges may be cheaper it doesnot necessarily make them the best investment. “Investors should not be seduced by lower charges,” he warns.
Indeed Dampier notes that many investment trusts have now introduced performance related fees, which can get as high as 4%, which can take away a lot of their outperformance.
“For me it is all about finding and buying the best fund managers,” says Dampier. “It doesn’t matter if they are open-ended or closed-ended. That said there are some more interesting funds in the investment trust universe than there are in unit trusts, and their closed-ended nature means funds can’t get to ridiculous sizes. While for IFAs they are a pain to use, this is not the case for the general public.”
Dampier points to the RIT Capital Partners and British Empire and Securities as two global generalist trusts he likes. Both, he says, have specific investment philosophies, with capital preservation being very important. “Both these trusts coped well in the recent bear market because of their capital preservation aim, which works well in a long-term investment scheme. Indeed for me a children’s saving plan should be the same as any investment plan and looking at the recent numbers, Witan and the F&C Investment Trusts haven’t actually done brilliantly in investment terms. Neil Woodford’s Invesco Perpetual High and Income unit trusts have thrashed both over the last few years.”
While many who point to global growth trusts as being ideal for long term savings schemes because of their diversity across countries, regions and sectors, Dampier notes that over the past 20 years the best performing unit trusts have been UK income orientated. “Compounding yields over an 18 year time period would a superb strategy for a children’s savings scheme,” he adds.
Whether held in a CTF or a straightforward savings scheme, it would appear using investment trusts to save for children has its benefits, especially in terms of cost. From a risk perspective, the global generalists appear to be the most appropriate funds and the providers of investment trust saving schemes say this is where most of the money goes into. On this basis it would appear they merit more representation in the new CTFs, but there are other options and not every investment trust is the same, so selecting the right portfolio is essential.