Where I am investing my son’s Junior Isa

Just over four years ago I decided it was time for some 'skin in the game' and opened my first stocks and shares Isa account. This year, however, I am feeling the pressure, as I am setting up my son’s first ever Junior Isa and investing on his behalf.

In deciding to invest the money I am not following the crowd, as most parents decide to park the money in cash. According to the latest Isa statistics, £858 million was subscribed to Junior Isa accounts in 2016/17, around 61 per cent of which was in cash.

There are various reasons behind parents deciding against the stocks and shares option, with a lack of understanding or knowledge of how to invest – or indeed where to invest – top of the list. There’s also the perception that the stock market is a ‘gamble’, whereas cash is a safe bet. 

The reality, however, is that over such a long-term time horizon new parents in particular can afford to put their capital at risk in pursuit of higher returns, as an 18-year timescale provides an adequate amount of time to ride out the peaks and troughs inherent in investing in the stock market. Moreover, cash may feel safe, but it is worth remembering its Achilles’ heel, which is that inflation slowly but surely erodes its real value over time. 

Added to that, savings rates remain at depressed levels, particularly in the case of cash Isas. Rates are higher for Junior Isa accounts, with Coventry Building Society the current market leader offering 3.5 per cent; but despite the more generous payouts, I believe I can obtain a higher return going down the investment route. 

First, then, I had to choose a platform. I chose Tilney Bestinvest as it charges on a percentage basis (0.4 per cent a year), which makes it suitable for smaller pot sizes such as a Junior Isa is likely to be, given its maximum subscription limit of £4,128 per year. There are cheaper providers, but I like the navigation of the website. 

The bigger dilemma was where to invest the money. Given that my son is only four months old and will not be able to get his hands on the cash until he is 18, for me it makes logical sense to invest in emerging market or Asian economies, which are growing at a much faster rate than their Western counterparts – a reflection of their youthful demographics and growing middle classes. This means plenty of taxpayers and spenders, and the theory is that this will translate into healthy stock market returns over the long term.  

When deciding where to invest I have opted for an investment trust, on the grounds that I prefer investment trusts to open-ended funds or unit trusts. There are a number of reasons for my view, but the main one is that I think the fund managers of an investment trust are more accountable for performance because they have board members to answer to. 

I don’t however like to overpay, and a couple of investment trusts I had in mind were on big premiums when I was about to hit the ‘buy’ button – a couple of days ahead of the market correction that played out at the end of January (timing has never been my forte). 

In the end, therefore, I settled on Aberdeen Asian Smaller Companies IT, overseen by Hugh Young, which was at the time on an 11 per cent discount. Following the sell-off (and after factoring in the trading cost) my son’s Isa is showing a small percentage decline, but this is to be expected at the start of any investment, and is par for the course when investing in a fund that is high-risk and will be prone to sudden dips. I am prepared to be patient and tuck the trust away for the long term. 

Over the long term, small company shares outperform large, and my son has time on his side to allow this phenomenon to play out. This is one of the main reasons why I have picked the trust, with the other being the manager at the helm. Hugh Young is widely regarded as one of the best Asian investors. 

At a recent presentation to investors, Young, who runs several funds and trusts, revealed that his biggest personal holding is in Aberdeen Asian Smaller Companies IT, and this was another factor that led me to invest. 

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