Best fund and trust investment ideas for a Junior Isa

Parents casting around for suitable investments for their children can afford to take some risk on long-term global trends rather than play it safe, say experts.

This might go against your natural instincts but an up to 18-year time horizon, if you open a Junior Isa when your child is born, means you can explore some niche and volatile areas of the market.

And in fact, their investment life is likely to be much longer, as even when they hit 18 they should still have many years of investing to go.

Parents can stash up to £9,000 a year in a Junior Isa for a child, and a third of those who are investors themselves have considered the option, according to research by Fidelity International.

Investing for the future: Parents can stash up to £9,000 a year in a Junior Isa for a child 

Reasons offered were helping to set up their children for when they are older, the tax benefits, and protecting their offspring against economic uncertainty.

We asked financial experts to give parents some tips on selecting investments for children and some fund and trust suggestions. 

What should you bear in mind when picking funds for a Junior Isa

Engage children in the decisions: ‘One of the main objectives for parents to consider is maintaining a level of interest in investing for their children,’ says Ben Staniforth, research analyst at Redmayne Bentley.

‘Ensuring that the funds they select contain engaging and innovative companies that are well known to young people will ensure they remain interested and continue to invest well into the future.

‘Well-known, high-quality companies such as Nike, Netflix and LVMH (owner of Louis Vuitton) should help to encourage children to track their performance and prioritise their wealth in the long term.’

Check the costs: Look out for the fees and charges, says Zoe Dagless, senior financial planner at Vanguard.

‘Costs can really add up over time, so make sure you’re opting for a Junior Isa with low charges – meaning more money for your child’s future.’

Take full advantage of allowances: ‘Junior Isas are a tax efficient vehicle in which the owner pays no income tax,’ says Anna Murdock, head of wealth planning at JM Finn. ‘The Junior Isa does not attract capital gains tax arising on the investment gains either.’

‘An interesting quirk in the current legislation is that 16 and 17 year old children currently have access to two Isa allowances: £9,000 for a Junior Isa in addition to £20,000 for an adult cash Isa.

‘Consideration may also be given to converting a Child Trust Fund into a Junior Isa, permitted since April 2015. If the CTF is not transferred, when a child reaches 18 they’ll still be able to access the money, or they can choose to transfer it into a normal cash Isa.

‘Junior Isa spending limits will be frozen at their current levels until at least 2023.’

You can take some risk: ‘The further away from needing to spend the money, the more risk and therefore potential return you are able to take, as long as you do it in a sensible way,’ says Dagless.

Anna Murdock: An interesting quirk in the current legislation is that 16 and 17 year old children currently have access to two Isa allowances

‘This is because your portfolio has time to recover from any perfectly natural market dips that might occur on your path to investment success.’

Market upsets are an opportunity: The market setback this year has brought an opportunity to accumulate exposure to some compelling areas of the market when you have a long-term time horizon, according to Gordon Smith, head of fund research at Killik & Co.

This view is reflected in his two fund tips below, which he acknowledges may well continue to experience heightened levels of volatility. 

However, Smith believes the long-term impact of the pandemic and instability in the world order caused by Russia have enhanced their long-term investment case.

‘Whilst specialist in nature they each could complement an existing core portfolio made up of broader global large cap focused fund strategies,’ he says.

What funds and trusts could be suitable for a Junior Isa?

Gordon tips… Polar Capital Biotechnology (Ongoing charge: 1.11 per cent)

This fund invests in a global portfolio of 40 to 60 firms developing a variety of medicines using different technologies, and is tilted towards mid and smaller-cap companies, says Smith.

The investment philosophy is that a growing number of tools and technologies targeting causes of disease and innovative new medicines are driving industry growth and profitability, he explains.

‘The biotechnology sector has derated over the last six months, removing much of the investor exuberance in the sector seen from the end of 2020.

Ben Staniforth: Ensure funds you select contain engaging and innovative companies that are well known to young people

‘However, the combination of the exponential growth in computing power, explosion in data collection, advancement in artificial intelligence and ongoing improvement in the understanding of life sciences has triggered a significant leap in innovation.’

Smith says this has the potential to revolutionise the healthcare industry and should not be ignored by long-term growth investors.

L&G Cyber Security UCITS ETF (ISPY-LON) (Ongoing charge: 0.75 per cent)

The outsized growth potential of cyber security products and services is tracked by an index created and maintained by a team of cyber-security specialists, according to Smith.

The portfolio comprises both infrastructure providers developing hardware and software, and service providers providing consulting and secure cyber-based services, he says.

‘The adoption of digital technologies has continued to accelerate over the pandemic period and this trend has been reflected in cybercrime figures with both the number and average cost of data breaches rising in each of the last three years.

‘Despite data security remaining at the forefront of IT spending intentions and strong earnings progression from this group of businesses, the index has lagged that of broader tech and valuation multiples have moved to a discount to the broader technology sector.’

Ben tips… Blackrock Global Unconstrained Equity (Ongoing charge: 1.03 per cent)

The fund’s long-term, quality mandate makes this a solid option for Junior Isas, says Staniforth.

‘It contains a raft of interesting and globally diverse companies, most of which people aged 10-100 will have heard of and possibly bought from. The fund’s high-quality management team and stock-picking ability should enable performance to continue in the long term.

Scottish Mortgage Investment Trust (Ongoing charge: 0.34 per cent)

This is one of the oldest and largest investment trusts listed in the UK, and it aims to invest in the most innovative and high-growth public and private listed companies the world has to offer, according to Staniforth.

‘Businesses such as Tesla, Epic Games (maker of popular video game Fortnite) and ByteDance (owner of popular social media app TikTok) have provided incredible returns for the trust.

‘While it does remain one of the most volatile large cap assets on the London Stock Exchange, investments in a Junior Isa should set the stage for a lifetime of investing and thus should focus on the long term.’

Emma-Lou tips… Rathbone Global Opportunities (Ongoing charge: 0.77 per cent)

A simple and effective way to invest is to pick a global fund, and this one has an excellent track record over the 17 years that James Thomson has been managing it, says  Emma-Lou Montgomery, associate director for personal investing at Fidelity International.

‘Historically it has seen good growth, but James can act defensively when needed. He makes active decisions, picking and choosing the best stocks for the fund as the market dictates – one of the key benefits of choosing an actively managed fund.’

‘Even as share prices were plunging in March 2020, he told us that he saw it as a “once in a lifetime opportunity”.

He’s equally bullish when it comes to tackling inflation. Describing it as a silver lining, he explains: “Inflation lifts earnings if you’re in the right sectors and the right companies”.’

Baillie Gifford American (Ongoing charge: 0.51 per cent)

‘The tech sector has turbo-charged the US market over the past decade and that doesn’t show any sign of stopping,’ says Montgomery.

Emma-Lou Montgomery: A simple and effective way to invest is to pick a global fund

‘The likes of Apple, Google, and Amazon are now the most valuable corporations in the world, rising to join Microsoft at the top and quadrupling the market size since the worst days of the 2008 financial crisis.

‘Any future-focused investment has to comprise some tech so the fund, from the home of Silicon Valley with 36.5 per cent of its portfolio in technology stocks, is a good choice.’

Fidelity Index World (Ongoing charge: 0.12 per cent)

‘To keep costs down and stop your gains being silently chipped away at over the years, a passive fund, which tracks an index irrespective of what the market’s doing, is a good idea,’ explains Montgomery.

Montgomery, who works at Fidelity International, says this Fidelity fund is a low-cost, low maintenance, highly-diversified way to do that.

Baillie Gifford Positive Change (Ongoing charge: 0.53 per cent)

‘We might hear a lot of funds declaring their “green” credentials, but the fund offers something truly innovative – letting you see the impact of your investment on the world,’ says Montgomery.

‘Its “impact indicator” gives metrics on the carbon, health and social impact of various investment levels.

‘This takes investment transparency to a new level and one that I think is very exciting and has real potential to prove there is added value in sustainable investing.’

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