Best Passive Investments for Children

Index tracking funds and ETFs
paullidd
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Best Passive Investments for Children

Postby paullidd » January 11th, 2017, 8:34 am

Good Morning everyone.

I have 2 children aged 3 and 6, and they have just inherited some money from their late grandfather.

I am looking to set up junior ISAs for them and investing the monies in passive index trackers. They have £12,000 each so the money will need to go into the ISAs over a couple of years, I can get the money in pre- and post- new tax year leaving about a third until 2018/2019 tax year.

In the past I have invested directly in individual company shares for myself but have no experience of passive investments.

I'm looking to put the monies into maybe 6 different investments (just a random figure I came up with).

Could anyone help with suggestions of various index trackers or other passive funds?

Also could anyone suggest the best platform for junior ISAs, I use TDD myself and have been happy with them, but any recommendations would be very welcome.

Kind regards
Paul

tjh290633
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Re: Best Passive Investments for Children

Postby tjh290633 » January 11th, 2017, 3:26 pm

I have four grandchildren, for whom I invest in Investment Trusts. They were all in different ITs, but then BSET changed managers and I elected to stay with F&C, so they are now in WTAN, FCI, ATST and FRCL.

Over the periods that they have been in those various ITs, the growth rates compared with the FTSE100 have been:

Start Date   21-Dec-01   27-Jun-03   05-Mar-10   15-Apr-04   07-Apr-11   02-Mar-15        
CAGR Witan FRCL FCI ATST BSET * FRCL
FTSE 2.23% 4.22% 3.68% 3.86% 3.49% 2.56%
IT on SP 5.99% 8.84% 6.28% 7.43% 0.05% 11.17%
Period 15.07 13.55 6.86 12.75 5.77 1.87 Years
* switched on 02-Mar-15

As you can see, BSET was the exeption, but the rest have grown more than a tracker fund would have done.

Furthermore the rate of dividend increase in each has been ahead of the RPI over the period.

TJH

helfordpirate
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Re: Best Passive Investments for Children

Postby helfordpirate » January 12th, 2017, 10:09 am

paullidd wrote:Could anyone help with suggestions of various index trackers or other passive funds?


I would just bung it in Vanguard Lifestrategy 80 Equity Acc.
One investment, low cost, does the rebalancing for you, easy for them to understand when the time comes, accumulates dividends, 80/20 equity/bond probably optimum given the long timescale of the investment, widely available on low cost platforms - fire and forget!

swill453
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Re: Best Passive Investments for Children

Postby swill453 » January 12th, 2017, 10:26 am

helfordpirate wrote:80/20 equity/bond probably optimum given the long timescale of the investment

Investing in bonds with a possibly 50 year timescale? Not sure I'd consider that optimal.

Scott.

Phileasrob
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Re: Best Passive Investments for Children

Postby Phileasrob » January 12th, 2017, 12:15 pm

I agree with Scott about bonds and would go for the Vanguard LS100 equity Acc instead.

PR

OhNoNotimAgain
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Re: Best Passive Investments for Children

Postby OhNoNotimAgain » January 12th, 2017, 1:32 pm

According to the Barclays Equity Gilt Study the probability of equities outperforming gilts over 18 years, not a bad time scale when investing on behalf of children, is 87%.

The bull market in fixed income that started on 30th September 1981 ended on 8th July 2016.

http://www.indexologyblog.com/2016/12/0 ... ing-point/



Rob

hiriskpaul
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Re: Best Passive Investments for Children

Postby hiriskpaul » January 12th, 2017, 2:54 pm

tjh290633 wrote:I have four grandchildren, for whom I invest in Investment Trusts. They were all in different ITs, but then BSET changed managers and I elected to stay with F&C, so they are now in WTAN, FCI, ATST and FRCL.

Over the periods that they have been in those various ITs, the growth rates compared with the FTSE100 have been:

Start Date   21-Dec-01   27-Jun-03   05-Mar-10   15-Apr-04   07-Apr-11   02-Mar-15        
CAGR Witan FRCL FCI ATST BSET * FRCL
FTSE 2.23% 4.22% 3.68% 3.86% 3.49% 2.56%
IT on SP 5.99% 8.84% 6.28% 7.43% 0.05% 11.17%
Period 15.07 13.55 6.86 12.75 5.77 1.87 Years
* switched on 02-Mar-15

As you can see, BSET was the exeption, but the rest have grown more than a tracker fund would have done.

Furthermore the rate of dividend increase in each has been ahead of the RPI over the period.

TJH


This has to be one of the most misleading postings I have seen so far on lemonfool. For a start Witan, FRCL and ATST invest globally. They do not invest just in FTSE 100 stocks. In addition, what about the dividends? The FTSE 100 has about double the yield of these ITs. No mention of risk either - FRCL at least overweights private equity/small caps and all 3 use gearing.

I note that Morningstar use the FTSE World Cap index as a benchmark for these trusts, so how about comparing the returns against this index? Also, to allow for the additional risk, compare against a World small cap index as well (% annualised total returns in GBP):



So despite the ITs advantages of running at a discount to NAV, gearing during a decade with high stock market returns and extra risk taking, the NAV returns of all 3 failed to beat the World index. On share price return they did better, due to discount reduction, but still only one managed to beat the index. But look at the risks taken to achieve it - small cap sized risk without the returns.

*Volatility is annualised, based on month end price data 29/12/2006 - 30/12/2016.

hiriskpaul
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Re: Best Passive Investments for Children

Postby hiriskpaul » January 12th, 2017, 3:16 pm

To answer the original question, I would recommend the products offered by Vanguard, BlackRock/iShares, SPDR, Fidelity and HSBC. Legal & General are ok as well, but don't buy directly from them, as this costs more than going to a discount broker. Choose ETFs or funds, but watch out for platform charges if holding funds.

Not sure who to suggest for child ISAs. I thought Halifax might be good, but it looks as though they don't offer child ISAs.

The target date has not been mentioned. If this is intended to help out with higher education costs for example, I would be more cautious than if it is intended to be held for their retirement.

helfordpirate
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Re: Best Passive Investments for Children

Postby helfordpirate » January 12th, 2017, 3:48 pm

swill453 wrote:
helfordpirate wrote:80/20 equity/bond probably optimum given the long timescale of the investment

Investing in bonds with a possibly 50 year timescale? Not sure I'd consider that optimal.

Scott.

Historically, I believe an 80/20 portfolio has provided almost the return of 100% equity but with significantly less volatility. For a fund like Vanguard LS it also captures a "rebalancing premium" as the fund will automatically swap out of bonds into equities when equities are down, lowering the average cost and boosting returns - something a 100% fund can't do.

But agreed over such a long timeframe, provided nobody panics when the fund falls 50% in a crash, 100% equity is certainly reasonable.

forlesen
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Re: Best Passive Investments for Children

Postby forlesen » January 12th, 2017, 11:36 pm

This has to be one of the most misleading postings I have seen so far on lemonfool. For a start Witan, FRCL and ATST invest globally. They do not invest just in FTSE 100 stocks...


I think hiriskpaul is being a little harsh here! While these ITs are now purely global vehicles, and define their performance targets accordingly (FRCL vs FTSE All World Index GBP, ATST vs MSCI All Country World Index, etc) this is a relatively recent change. Prior to the 2013 annual report, FRCL's performance target was for a long time based on 40% FTSE All-Share/60% FTSE WI World ex UK. Similarly, for Witan, the benchmark right up to the most recent annual report remains a composite of four indices: the FTSE All-Share Index 40%, the FTSE All-World North America Index 20%, the FTSE All-World Europe (ex UK) Index 20% and the FTSE All-World Asia Pacific Index 20%. And of course, they both held proportionately large holdings of UK stocks. ATST's targets were more fuzzily defined, but they held similar proportions of UK stocks (e.g. 38.6% in 2012).

So I think comparisons with both FTSE indices and All World indices are valid for these vehicles (at least, looking back 5-10 years from now). Clearly, such comparisons should be done on a total return basis, with income re-invested. I happen to have a Trustnet portfolio that provides this, and I would say that on a 5 year basis, all three trusts come out somewhat ahead of FTSE World index, and way ahead of FTSE All Share and FTSE 100.

On a 10 year basis, I'd agree with you that none of the ITs beat the World index by a convincing margin (and ATST is well behind it), but then, that was not fully the goal for the majority of that period. I haven't done a proper calculation, but I think they would all have beaten a total return benchmark based on 40% FTSE All Share + 60% FTSE World Ex UK (I'm less sure about ATST than the other two).

But all in all, I will admit that if I was investing now for the very long term, I would be looking at World Index trackers for the core holdings.

masmon
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Re: Best Passive Investments for Children

Postby masmon » January 13th, 2017, 8:28 am

For my son I have invested his inheritance from my mother in ishares SWDA (core MSCI world) and a small amount in national savings bonds.

ishares ETF SWDA is a good choice as it is an accumulating fund with global exposure albeit only 6.45% in the UK - I want my son to learn the importance of being careful with money and for him to save & invest from an early age. As the amounts he invests are not that large (a few hundred pounds per year at the moment) it makes more sense to use a single fund without the stamp duty costs that individual shares or trusts would attract. After Brexit I may add an ETF such as ishares MIDD (midcap) to capture greater exposure to the UK. Extra money gets invested when the market suffers a correction not when price is at 52 weeks high, this has been an interesting and I believe valuable learning experience for him.
What has been encouraging has been to see how he relates to the companies his fund is invested in, as many are companies producing exactly the products he enjoys using and can see around the home.. Apple, Samsung, Toyota etc..

hiriskpaul
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Re: Best Passive Investments for Children

Postby hiriskpaul » January 13th, 2017, 1:50 pm

forlesen wrote:
This has to be one of the most misleading postings I have seen so far on lemonfool. For a start Witan, FRCL and ATST invest globally. They do not invest just in FTSE 100 stocks...


I think hiriskpaul is being a little harsh here! While these ITs are now purely global vehicles, and define their performance targets accordingly (FRCL vs FTSE All World Index GBP, ATST vs MSCI All Country World Index, etc) this is a relatively recent change. Prior to the 2013 annual report, FRCL's performance target was for a long time based on 40% FTSE All-Share/60% FTSE WI World ex UK. Similarly, for Witan, the benchmark right up to the most recent annual report remains a composite of four indices: the FTSE All-Share Index 40%, the FTSE All-World North America Index 20%, the FTSE All-World Europe (ex UK) Index 20% and the FTSE All-World Asia Pacific Index 20%. And of course, they both held proportionately large holdings of UK stocks. ATST's targets were more fuzzily defined, but they held similar proportions of UK stocks (e.g. 38.6% in 2012).

So I think comparisons with both FTSE indices and All World indices are valid for these vehicles (at least, looking back 5-10 years from now). Clearly, such comparisons should be done on a total return basis, with income re-invested. I happen to have a Trustnet portfolio that provides this, and I would say that on a 5 year basis, all three trusts come out somewhat ahead of FTSE World index, and way ahead of FTSE All Share and FTSE 100.

On a 10 year basis, I'd agree with you that none of the ITs beat the World index by a convincing margin (and ATST is well behind it), but then, that was not fully the goal for the majority of that period. I haven't done a proper calculation, but I think they would all have beaten a total return benchmark based on 40% FTSE All Share + 60% FTSE World Ex UK (I'm less sure about ATST than the other two).

But all in all, I will admit that if I was investing now for the very long term, I would be looking at World Index trackers for the core holdings.


Probably a bit harsh yes. "Misguided" would have been a better word to use as I am sure there was no deliberate attempt to mislead.

I have become very cynical about the benchmarks fund managers choose. They like to set a low bar that can be repeatedly achieved, especially so once they start gearing up. This helps with marketing and in some instances keeps the performance bonuses rolling in. During the good times most investors don't twig that they have bought a crock. The last FRCL report I looked at showed 10% in private equity for example, so still not reflected in the benchmark. The benchmarks are often only for reporting purposes, with the fund managers having huge discretion over asset allocation and levels of gearing.

As for the last 5 years, on the surface these trust do appear to have delivered better performance, but they are not as good as they should have been for the risks being taken. As an example benchmark, let's say someone geared up an investment in Vanguard's World ETF by just 5%, readjusting at the end of each year, with funding costs of 2%. That funding cost would easily have been available to private investors through IB for example who charge LIBOR+1.5% on the first £80k of margin and LIBOR +1% on the next £720k. That would have raised the 5 year return on the ETF from a CAGR of 13.0% to 16.2%, beating the NAV performance of all the trusts. That is before looking at other risks these ITs have been taking with private equity, etc.

I think we are in agreement about core holdings. I go for cheap trackers these days for the bulk of my equity investments and then take on specific risks with specialist ITs etc. that target niche areas.

hiriskpaul
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Re: Best Passive Investments for Children

Postby hiriskpaul » January 13th, 2017, 2:49 pm

masmon wrote:For my son I have invested his inheritance from my mother in ishares SWDA (core MSCI world) and a small amount in national savings bonds.

ishares ETF SWDA is a good choice as it is an accumulating fund with global exposure albeit only 6.45% in the UK - I want my son to learn the importance of being careful with money and for him to save & invest from an early age. As the amounts he invests are not that large (a few hundred pounds per year at the moment) it makes more sense to use a single fund without the stamp duty costs that individual shares or trusts would attract. After Brexit I may add an ETF such as ishares MIDD (midcap) to capture greater exposure to the UK. Extra money gets invested when the market suffers a correction not when price is at 52 weeks high, this has been an interesting and I believe valuable learning experience for him.
What has been encouraging has been to see how he relates to the companies his fund is invested in, as many are companies producing exactly the products he enjoys using and can see around the home.. Apple, Samsung, Toyota etc..


I think SWDA is an excellent choice as well.

Instead of MIDD, you would be better off in Vanguard's VMID by the way. OCF only 0.1%, compared with MIDD's 0.4%.

cleo2002
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Re: Best Passive Investments for Children

Postby cleo2002 » January 13th, 2017, 2:52 pm

Hi Paul

I set up Junior ISAs for my two children via Charles Stanley Direct. The money is invested in Vanguard Lifestrategy 100.

I'm a happy customer of Charles Stanley Direct, setting up and running the accounts is incredibly straightforward. I did have one of the JISA with Fidelity, they were okay to but I prefer Charles Stanley Direct and it's easier for me to keep an eye on the accounts if they're all in one place.

Here's a link to Monevator's excellent broker comparison table:

http://monevator.com/compare-uk-cheapes ... e-brokers/

Cleo.

moorfield
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Re: Best Passive Investments for Children

Postby moorfield » January 13th, 2017, 10:06 pm

They have £12,000 each


The elephant in the room:

What are your offspring - realistically - most likely to do with their Junior ISA pots when they wrest control of them at an age when they think they know better ?

Or to turn the question around:

What would you have done with your parents' overtaxed hard-earned lump sum at that age ?

(I should add we make full use of Mr+Mrs allowances' first for the offsprings' savings - ISAs & VCTs)

kempiejon
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Re: Best Passive Investments for Children

Postby kempiejon » January 14th, 2017, 11:43 am

moorfield wrote:What are your offspring - realistically - most likely to do with their Junior ISA pots when they wrest control of them at an age when they think they know better ?

Or to turn the question around:

What would you have done with your parents' overtaxed hard-earned lump sum at that age ?


It's their inheritance, from their grandfather who's wish was, after he died, to give the cash to the kids - presumably without strings as none were mentioned in the OP. Let's hope the parents managed to bring up kids with common sense and no desire to use the money for whatever exotic use I think you're implying. Anyway it's their money. In the mean time the well intentioned parents, as custodians for the cash, want to preserve and even increase the real value.
A junior ISA wrapping a simple tracker, perhaps an all world ETF could be a good option. I suppose an accumulation fund would avoid the admin of re-investing any income and an eye on total ongoing charges being prudent. I have no specific recommendation on a good provider mind.

moorfield
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Re: Best Passive Investments for Children

Postby moorfield » January 15th, 2017, 7:45 pm

kempiejon wrote: Let's hope the parents managed to bring up kids with common sense and no desire to use the money for whatever exotic use I think you're implying. Anyway it's their money. In the mean time the well intentioned parents, as custodians for the cash, want to preserve and even increase the real value.


Indeed I'm suggesting that as custiodians of our juniors' cash we should understand that Junior ISAs come with that downside risk attached, however well intentioned we are. My argument here is that downside risk can be eliminated simply: don't use the Junior ISA wrapper, and fill up your own Mr + Mrs wrappers first with savings earmarked for offspring (I'd wager not many couples saving into Junior ISAs will be making full use of their own combined £40000 allowance next year...).

M

scrumpyjack
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Re: Best Passive Investments for Children

Postby scrumpyjack » January 15th, 2017, 9:05 pm

Generally in my experience most 18 year olds do not go mad when they come into money at 18.

What many of my relations have done is put money into bare trusts (but it now has to be grandparents rather than parents), the trusts income is treated as the personal income of the child with personal allowances, CGT allowances etc, but the shares are registered in the name usually of the parent and designated with the initials of the child. At 18 the child is entitled to demand the shares are transferred to them, but none of the 18 year olds in our family asked for that and the share remained safely in the parents name as bare trustee for several/many years afterwards!

Gadge
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Re: Best Passive Investments for Children

Postby Gadge » January 16th, 2017, 11:08 am

I would suggest VWRL as one suitable option.

1: It is reasonable in admin costs @ .25% p.a.

2: It invests globally in developed and emerging markets.

3: It is not a fund so avoids onerous and unjustifiable platform fees.

4: It is possible to save some further admin cost by buying the underlying investments but I wouldn't bother.

https://www.vanguard.co.uk/uk/portal/lo ... docId=1011

paullidd
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Re: Best Passive Investments for Children

Postby paullidd » January 16th, 2017, 1:34 pm

Thanks everyone for the replies.

I think I will use TD Direct for the JISAs, as I already have my own account with them and there is no JISA fee, also, Iam not particularly worried about them being bought by II.

I will be trusting my children with their own money and at the end of the day should they choose to blow it, then I'm sure there will be a valuable life lesson for them to learn. I also think that they will have learnt to be reasonably cautious and thoughtful before committing a large amount of money to anything.

My initial intention is to invest equal amounts in Trackers for FTSE 100, FTSE 250, S+P 500, and a global Tracker/Fund (TBD).

Again many thanks for all the food for thought.

Paul


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