JUNIOR ISAS – SOME PARENTAL GUIDANCE
The Junior ISA which is due to be launched in November 2011, is a new government scheme designed to encourage saving. It is warmly welcomed by Fidelity because it has the ability to teach young people the importance of saving as early as possible in their life. This lesson has never been more important with the increased focus on the individual to provide for their future themselves, rather than rely on the state or employer. In addition to encouraging the discipline of saving for the child, it will also help focus adults to save and invest on behalf of their children for anything from university fees to first home deposits.
How can parents help their children get the best out of their Junior ISA? What kinds of investment choices are available and what factors should parents consider? When should they consider investing? As with all investments, the planned holding period or investment goal is important. Generally, the longer the time horizon for any investment, the more beneficial it will be to own higher return (but higher risk) assets. For a Junior ISA that is opened for a newborn child, the time horizon will be the full 18 years; if the child is older, then a tilt towards lower risk assets may be more appropriate. This also depends on what is being saved for. If it is university fees then there is a time restriction on when the investment will be needed. If there is no time restriction then the assets will automatically transfer into an adult ISA at maturity, and therefore still be at the early stages of the individual’s saving lifecycle.
Needless to say, investing on behalf of someone else adds an extra layer of complexity to investment decision-making and parents may choose to adopt a lower risk profile for their children than they would for themselves.
One seemingly simple option may be to choose just one fund to own for the whole life of the Junior ISA. When it comes to actually choosing a fund however, parents will be faced with a confusion of choice, with thousands of available funds in the market place, all seemingly offering something different.
In general, it is advisable to look for a fund that is tried and tested and which has an experienced and well established fund manager, rather than one which is just currently top of the league tables. Exposure to a single market or sector increases risk and can mean missing out on healthy returns elsewhere. Owning just one fund also adds individual manager risk – the possibility that a manager’s style or philosophy may move out of favour and that the fund could see periods of underperformance. With such an “all the “eggs in one basket” approach, investors may wish to be more cautious in their choice of fund.
In any case, investing in just one equity or fixed income fund by itself is probably not the most prudent option. Investing in a range of funds can add diversification across asset classes and investing in different strategies within asset classes can provide better returns at a lower risk over the longer term. Obviously, selecting a number of different funds would mitigates the issue of single manager risk. However, doing the necessary due diligence for a suitable group of funds and deciding on the right mix of asset classes, as well as monitoring and changing the portfolio over time as market conditions change, requires a significant commitment of time and effort – a luxury that many busy parents may not have. An additional complicating factor is Junior ISAs will only be able to hold funds from one provider at anyone time, unless parents invest through a fund supermarket.
In many cases, a managed solution where the decision making process is outsourced to experienced professionals may therefore be a good idea. These are multi-asset or multi-manager funds, where the specific asset allocation and fund manager selection choices are made for the investor. These funds have the ability to move across different assets and offer the diversification which should lead to lower risk and volatility. The manager of these funds will choose a range of different underlying funds in which to invest, according to whatever is seen as the most advantageous asset class and whoever is judged to be the strongest manager within that asset class. These funds will be flexible and dynamic in their investing style and will change their exposures over time depending on the prevailing conditions.
Another type of managed solution which may be particularly appropriate to Junior ISAs are target date funds. These are also multi asset funds, but the difference being that they gradually adjust the asset mix over time to become more conservative as the target date nears. This allows the investor to review their investment needs, time horizon and desired outcome once the target date has been reached.
Like multi asset and multimanager funds, target date funds manage the asset allocation within the fund on behalf of the investor and so are suitable for those who do not wish to pick asset classes or funds themselves. Using a fund where the asset allocation is managed to move gradually into cash over time, whilst making sure the investor is exposed to the highest potential return assets for a significant period can be an added advantage. The ‘roll-down’ strategy should ensure that such funds will have a progressively higher weighting to more conservative assets the closer they are to the target date – so this is something that some parents, particularly those opening a Junior ISA for older children, may wish to consider, since their investment horizon will be shorter and they may not wish to invest solely in equities or other higher risk asset classes.
To sum up, Junior ISAs offer a straightforward way for parents to save on a tax efficient basis on behalf of their children. Parents will need to think carefully in order to decide on the right kind of fund or funds to hold within the Junior ISA. However, the returns from long term investing can be significant, and the earlier that parents can commit to saving for their children, the greater will be the potential for reward in the future.
About the Author : George Pardew, CO-HEAD, INVESTMENT SOLUTIONS GROUP, FIDELITY INTERNATIONAL
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