According to the Association of Investment Companies, only one investment trust would have been able to produce an Isa millionaire in the 20 years since the introduction of Isas.
The Isa millionaire club is estimated to include about 1,000 savers. These Isa millionaires have managed to accrue savings of £1 million in their tax-free Isa pots by contributing the maximum allowance each year and investing it directly in shares with attractive returns.
Many of these Isa millionaires are likely to have followed in the footsteps of the politician and investor Lord John Lee, who announced himself an Isa millionaire in 2003, based on his investments in small companies through a Personal Equity Plan (Peps) in the late 1980s, and then an Isa account when Isas superseded Peps in 1999. Those investing in investment trusts, however, are unlikely to have joined the club so far.
According to the Association of Investment Companies, only one investment trust – Aberdeen New Thai – would have been able to produce an Isa millionaire in the 20 years since the introduction of Isas.
Research from the trade body shows that if an investor had placed each year’s maximum tax-free investment allowance from 1999 to 2018 - a total of £206,560 - in the trust, their Isa pot would now be worth £1,070,583.
Such an investment strategy, however, is unlikely to have been followed by many people. For most investors, using their whole allowance each year for one trust, let alone a trust focused on investing in a single emerging market economy, would go against all investment sense on diversification and risk.
A number of other investment trusts have come close to the £1 million mark, with a total of five trusts returning over £900,000. Echoing the success of direct equity stockpickers, smaller company-focused investment trusts were well represented, with Aberdeen Standard Asia Focus, Scottish Oriental Smaller Companies and BlackRock Smaller Companies and Rights & Issues among the five. Scottish Mortgage also made the list.
Interestingly, the presence of Aberdeen Standard Asia Focus, Scottish Oriental Smaller Companies and Aberdeen New Thai in the list also suggests that investment trusts have successfully captured the benefits of Asia’s explosive economic growth over the past two decades.
Again, however, it would have been inappropriate for most investors to have all of their Isa allowance for the past 20 years invested in any single one of these trusts. As Annabel Brodie-Smith, communications director of the AIC notes, “it’s interesting to see the best performers but it’s important to have a diversified and well-balanced portfolio which suits your needs”.
At the same time, the lack of Isa millionaires produced by investing in trusts compared to those who invest in individual company shares should not put savers off using trusts. While individual share-picking has been richly rewarding for some, either through skill or luck, it can be highly risky, and could lead to significant capital losses in the short term at least.
Although investment trusts can also be risky, their inherently diversified nature means that even if some of the companies held in the trust fail along the way, their impact on the overall trust portfolio is relatively modest.