Short of ISA ideas? This week as part of our Guide to ISA Investing we reveal the top rated and top performing stock and fund ideas – as well as sharing where the experts stash their cash, the latest news from the 2017 Budget Report and how to reduce your tax bill.
Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and joining me today is Adrian Lowcock, Investment Director for Architas.
Hi, Adrian.
Adrian Lowcock: Hello.
Wall: So, it's our ISA special week this week and we're taking a look at those junior investors today who can invest through the relatively new junior ISA. So, what is a junior ISA?
Lowcock: So, junior ISA is designed, as you guessed, for children basically from the age of 0 to the age of 18. They put £4,080 into a junior ISA this tax year. And the idea is to basically get saving and investing from an early age so that they have a pot of money when they turn 18 that they can use for whatever they want, to buy a car, go to the university, help them buy a house or support them when they start a job.
Wall: And the key thing here is obviously the parent or guardian is investing on behalf of the child. So, they make the investment decisions up until 16, but at 18 it really is that child's cash, isn't it?
Lowcock: Yeah, and that's very important because at 18-years-old they get the cash. They can keep it invested and it becomes an adult ISA or they can just take the money and do what they see fit it. So, I think, education is actually very critical around this. Talking to your children from a very early age about what this is. Actually, tell them what the product is and what you want it for them to do. So, easy to help them start a job or getting the housing ladder and I think that really helps sort of perhaps minimize or reduce some of that risk so they could just go off and spend it on whatever.
Wall: And the other key thing about it being for the child is about the time horizons are different. You may, I indeed invest my ISA on a shorter-term basis than I invest my SIP. But with the junior ISA potentially you're making 10 to 18-year investment decisions here. So, you can afford to take a longer time horizon.
Lowcock: Yeah, absolutely. Unlike the adult ISA you can't take the money out until they are aged 18. So, theoretically, they could have it for a minimum of 18 years and they can actually have it for even longer because they can keep it invested for much longer. But even 18 years or 10 years, as you say, is a long time and it gives you that focus to perhaps think about things more longer term and invest for that longer term because that money is going to be tied up one way or another for up to 18 years.
Wall: And with that in mind what sort of funds should we be looking at or could we be looking at with that longer time horizon for a Junior ISA?
Lowcock: So, I think, it's important to remember this isn't your money and therefore you shouldn't necessarily sort of go all guns blazing and take huge amounts of risk even though you've got that longer time horizon. So, I sort of picked a couple of funds that have an income bias towards them along with some global growth or some growth focus on that.
So, the first one I chose was Fidelity Global Dividend run by Dan Roberts. Now, he does target an income on that, but it gives you that global diversification. So, this is a good core fund. The income he targets is a combination actually. He doesn't just target income and not growth. It's sort of capital appreciation with income. So, very much looking for companies that have good strong balance sheets and are able to grow that dividend and that capital over time.
Wall: And remember to choose the accumulation share class and to reinvest those dividends because of course compound interest could double your money in half the time?
Lowcock: And that's the power of income is that if you just reinvest those dividends year in and year out and you've got, say, 18 years to do so, that can be a very powerful force in investing. So, yeah, the accumulation shares would be the right choice here.
Wall: And what's the second fund?
Lowcock: So, playing on a long-term theme, I picked the Schroder Asian Income Fund managed by Richard Sennitt. Now, this is an unconstrained fund but it does have an income focus and because of that income focus he is looking very much at what the dividend yield is compared to the share price. It's a long-term theme that taps into this Asian trend that we've seen which is basically sort of growing demographics. They've got very strong young demographics, young population, growing middle classes there. And Asian markets, although the stock markets haven't done necessarily so well in recent years, the underlying growth is still there. So, this is a long-term investment theme and the income is very attractive and you get that reinvested and you get that compounding again.
Wall: And of course, with 10, 15, 18-year time horizon you can afford to stomach a little bit of volatility which can happen in Asian markets?
Lowcock: Yes, absolutely. So, what we've done here with this fund is actually because of its income focus and its cautious nature it actually complements that. It will protect on the downside anyway, but then you've got the time horizon to sort of help smooth that out as well. So, this should be a sort of smoother run in what is typically a more volatile market.
Wall: And what's the third fund you've picked?
Lowcock: So, this one is more of a growth-orientated one, but then I've gone back to the U.K. because we are sterling investors on the whole and therefore U.K. focus does matter. And this is the Franklin UK Smaller Companies Fund. This is run by Richard Bullas and Paul Spencer. Now, they take a three-pronged approach to investing in smaller companies. They've got this sort of core growth area which has sort of good visible income, income generation from the company, so good cash flow. And then they complement that core with unloved, undervalued companies where the growth perhaps isn't fully recognized by the market.
And then also the third prong which is basically these recovery stocks. They tend to be a bit more cyclical in nature. And because it's smaller companies, you need that long-term horizon to really benefit because there can be years where smaller companies really do underperform and they can fall 30%, 40% in really bad times. So, you need that long-time horizon to really benefit from it.
Wall: And for people who are setting up their Junior ISA today with just less than a month of this tax year left to do so, what are the different ways that you can invest in terms of lump sum versus regular saving?
Lowcock: So, if you're in a situation, particularly you're coming to the end of the tax year, lump sum would probably be the most effective way to the get the benefit of it because you can use the full allowance. But going forward, looking into the new tax year, you can do a regular saving. So, you can put a small amount away each month. That can be from as little as £25. It really depends on how much you can afford to put away.
The pros and cons of both are by regularly investing you sort of buy more when the price of shares fall and less when prices are high. With the lump sum, you can effectively just get it done and you're confident that you've used the full allowance. But you can also hold it in cash and wait to sort feed money and like that as well. So, it really depends on what you have. If you don't have the cash available today, then regular saving is much more beneficial. But if you have a lump sum, then you can put it away before the end of the tax year.
Wall: Adrian, thank you very much.
Lowcock: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
