Many parents use tax-efficient Junior ISA accounts to save for their children, but how do they decide where to invest for their children’s future?

Junior ISA accounts can grow tax-free, and can be opened from birth, with parents and grandparents able to pay in money each year, with the current tax year’s limit being £4,260.

The money is locked up until the child reaches the age of 18, at which point the child can decide what to do with the money – whether to keep it invested or cash it all in.

A study of a large sample of AJ Bell YouInvest customers for the 12 months to 30 September 2018 shows that just 7% of Junior ISA holders cashed out their accounts when they reached the age of 18. This low number is very encouraging as it suggests those still retaining the invested money are well-placed to start their own longer-term investing habit.At the age of 18, the average Junior ISA account among AJ Bell Youinvest customers had an average of almost £12,000 in it. The maximum amount someone could save into a Junior ISA, if they started from the launch of Junior ISAs in 2011 and saved the full limit each year, would be £31,468.

If parents had started from the child’s birth using the Junior ISA’s predecessor the Child Trust Fund, and still saved the maximum each year, they would have a pot worth up to £39,668 today – assuming
zero growth.

HOW ARE PARENTS INVESTING THEIR CHILD’S ISA?

We’ve looked at the investment make-up of AJ Bell YouInvest Junior ISA customers who reached the age of 18 in the past year. This means the accounts we’re looking at represent the final Junior ISA pot that many will end up with, and also reflect the growth in investments in the previous years.

Almost a third of the money is invested in funds. Investment trusts are also popular, with 16% of all Junior ISA assets in them, while direct UK shares account for 16%, and AIM-quoted shares accounting for another 4%.

Cheaper ‘trackers’ or exchange-traded funds (ETFs) account for another 16%, while bonds account for less than 1% of the total sums invested, far below the proportion invested in shares listed overseas, which account for nearly 3% of all assets.

Around 15% of the money is sitting in cash. The level of cash you’d want in your account depends on what you plan to do with the money, and when you envisage your child using it.

It’s understandable that parents will want to keep a certain portion of the pot in cash, to have a safe haven asset and de-risk the portfolio. It is also likely that some parents have gradually sold investments as their child neared the age of 18, in anticipation of them using the money or cashing out the account.

A DECENT APPETITE FOR RISK

Parents are willing to take risk with their children’s savings
pots – which makes sense considering the money is locked away for up to 18 years, and so there is time to ride out the market highs and lows.

There is a smattering of biotech and healthcare trusts, including Biotech Growth Trust (BIOG) and Worldwide Healthcare (WWH). A handful of parents even plumped for holdings in Vinacapital Vietnam Opportunity (VOF), an investment trust focused entirely on Vietnam.

Technology holdings are a big feature among Junior ISAs, with tech-heavy Scottish Mortgage (SMT) by far the most popular holding for parents.

These parents will be happy with their choice, as the trust has risen by 631% in value in the past 10 years – turning a £4,000 investment into almost £30,000. Alllianz Technology Trust (ATT) and Polar Capital Global Technology (B42W4J8) are other popular picks.

Individual technology stocks also feature, with Google’s parent company Alphabet a regular holding, as is tech giant Apple and social media giant Facebook. Netflix and Amazon are less popular but still feature, while just a handful of portfolios hold car maker Tesla – possibly because it’s a newer company.

However, a large number of parents pick the option of outsourcing the investment decisions and buy one-stop-shop funds, which split the investments across different asset classes and geographies. Vanguard’s LifeStrategy range of portfolios and AJ Bell’s own passive range of funds are hugely popular with time-strapped parents who don’t want to make investment choices themselves.

Laura Suter, personal finance analyst, AJ Bell

WHAT ARE THE POPULAR FUNDS IN JUNIOR ISAS?

Renowned fund managers, who have operated for a long time and have proven track records are undoubtedly popular for all investors, but particularly for parents who are investing their children’s future money.

Terry Smith’s Fundsmith Equity (B41YBW7) fund is among the most popular funds in AJ Bell Youinvest’s Junior ISA accounts, while his newer Fundsmith Emerging Equity Trust (FEET) also has a decent following.

Nick Train’s Lindsell Train Global Equity (B3NS4D2) fund has many fans, while Neil Woodford’s Woodford Equity Income (BLRZQ73) and Woodford Income Focus (BD9X6D5) funds are hugely popular with parents saving for their kids.

His newer Woodford Patient Capital Trust (WPCT) also gets a decent showing, although some 18-year-olds will not thank their parents for this particular investment, as it is currently down 15% since launch in 2015.

POPULAR STOCKS IN JUNIOR ISAS

AJ Bell Youinvest’s Junior ISA customers seem to be attracted to many FTSE 100 giants, with pharmaceutical companies AstraZeneca (AZN) and GlaxoSmithKline (GSK), oil giants BP (BP.) and Royal Dutch Shell (RDSB), UK bank Lloyds (LLOY), consumer goods giant Unilever (ULVR) and telecoms firm Vodafone (VOD) among the popular holdings.

British mining stock Sirius Minerals (SXX) has also proved popular with investors, appearing in decent number of portfolios. Over five years the share price is up 274%, although it has slumped recently. 

‹ Previous2018-11-22Next ›