Like many younger investors Jake Topp is focused on getting on the housing ladder. He has tried to make the most of various government-led tax efficient savings schemes available to boost the value of his investments.
I think the energy and oil sectors are very underpriced at present
He says: “I have aspirations to buy a house at some point in the future, but it’s not easy for my generation to get enough money together to put down a deposit.
“It’s not often we get help from the government. I would be saving for my first home anyway, so these schemes provide a nice bonus on top.”
Topp, who is a trainee accountant, opened a Help to Buy ISA on the first day that they were available. He says: “I opened it with the bank offering the best interest rate at the time.”
Help to Buy ISAs pay an additional 25% cash bonus once individuals have saved £1,600 into the account. They can be opened with a lump sum of up to £1,200 but then the maximum that can be saved is £200 a month. Savers like Topp earn a bonus of £3,000 if they save the maximum £12,000.
But Help to Buy ISA savings have to be kept in cash, which can restrict potential returns. Even though these ISAs pay better interest rates than ordinary savings accounts, they too are affected by the low interest rate environment.
Instead, Topp has now switched into a new Lifetime ISA which the Government launched in April 2017.
Lifetime ISAs Offer Investment Variety
Lifetime ISAs are a hybrid between pensions and ISAs. Money can be withdrawn only to pay for a deposit on a first home or on your retirement.
Like the Help to Buy ISA, this offers a 25% top up on contributions, but as individuals can invest more into these savings, these top-ups are potentially worth far more. Savers can invest up to £4,000 a year into an Lifetime ISA; those saving the maximum are therefore entitled to a £1,000 annual bonus.
This bonus is akin to the basic rate income tax relief available in a pension – but unlike a workplace pension there is no supplementary contribution from an employer.
Topp has invested in funds, rather than individual shares, as he is more familiar with these types of investments. He has invested through Hargreaves Lansdown, and says he likes the wide range of funds available. It was also easy to switch from one type of ISA to another.
He says: “I’ve gone for funds because I’m not familiar with the nitty gritty of picking individual shares. I’ll stick with funds as they have done well for me in the past.”
Undervalued Assets
Topp likes to invest in sectors that he considers undervalued, with have the potential for higher growth over the longer term. “I think the energy and oil sectors are very underpriced at present, so I’ve been investing in that area. I have a feeling that in the next five years, oil is going to go through the roof and the share prices will follow.”
Two of the funds he has invested in are Artemis Global Energy and Investec Global Energy. However, given the relatively weak oil price neither fund has had particularly sparkling returns in recent years. Investec Global Energy, for example, is down 10% year on year, and has delivered negative returns over three and five years, according to Morningstar data.
Topp is looking to diversify his equity holdings – although by following a high growth strategy he recognises that concentrates risk. He says: “To try to get some diversification I’ve also invested in smaller company funds and in India.”
Topp invests in Jupiter India, a four-star rated fund that has a Bronze Rating from Morningstar analysts. The manager, Avinash Vazirani, has been investing in the Indian equity market for over 20 years and has run this fund since its inception in February 2008.
Analyst Lena Tsymbaluk says: “The approach can be best described as growth at a reasonable price. The manager aims to identify under-researched stocks with strong growth prospects that have not been priced fully by the market.
“This has led the manager to favour mid- and small-cap names, many of which are not in the benchmark. However, he also has capital-preservation as a priority, preferring to invest in high-quality companies with strong fundamentals.”
To get exposure to smaller companies Topp has invested in Schroder Small Cap Discovery. This fund invests in smaller companies in Asia, and other selected emerging markets. Over the year to date the fund is up 9.52%, according to Morningstar data, and it has produced returns of 7.52% annualised over the past three years.
