As the Child Trust Fund adverts keep telling us, you never know what your child is going to grow up to be. However, if they were born before the scheme was introduced – i.e. before September 2002 – or you don’t want to lock your money away, or you don’t like the idea of your child automatically getting the stash at 18, there’s a good chance your child is going to grow up to be disgruntled and short of cash – unless you investigate the other options available.

Given the time periods involved, the experts agree that it’s worth considering share-based investments. James Budden, marketing manager for the Witan Investment Trust, says, ‘Investing for children is often for longer – such as 15 years or more. This lends itself more to equity investing because, historically, equities have provided more in the way of returns over this sort of period, and investors can afford to take a greater degree of risk.’ It is, therefore, worth looking at the children’s savings schemes set up by unit trust and investment trust companies to drip-feed money into the stock market over time.

Little and often
These are essentially structures that allow you to invest in an investment trust or unit trust. They have a few features to make them easier for parents to save into, including low minimum payments. The Scottish Investment Trust’s dedicated children’s savings scheme, Stockplan: A Flying Start, allows regular monthly payments from £25, or lump sums from £250, while the Witan Jump scheme allows £25 per month or per quarter, and lump sums from £100.

They also allow investors to set up a monthly direct debit into the account. Budden says 40 per cent of Jump investors choose this option, with an average regular saving of £50. This not only makes it easy for investors to put money aside from their monthly budget without really noticing, but it enables them to take advantage of pound-cost averaging.

This means that by investing the same amount every month, you take the rough with the smooth. Sometimes you will be buying when the shares are high and expensive, and sometimes you will buy when they are low and cheap. The net result of this process should be that, on average, you time your investment well, and you don’t run the risk of piling into an investment at the top of the market.

This is particularly pertinent at the moment, when many investors are convinced that shares are cheap and should recover, but cannot be sure whether they will fall for six months or so first. By spreading your investment, if things get cheaper over the coming months at least your successive contributions are buying more units. And if they recover quickly, at least your early payments will have bought units at a lower price.

Added extras
The children’s versions of these savings schemes often have a variety of other features to fit them to the needs of both children and parents.

They will have regular statements written in a way that makes them straightforward to understand. Some schemes even allow investors to look at the value of their plans online in real time. And some of the investment trust-based schemes have the additional benefit of being set up without broker commission, so often all an investor pays is the stamp duty when they buy into the fund. (Investment trusts, as listed companies, attract stamp duty when you buy their shares. There is no stamp duty to pay on investments into open-ended investment companies or unit trusts.)

Most of them are designed so that they can be set up in one of two ways. The first is a designated account. Sherry-Ann Sweeting, marketing manager of the Scottish Investment Trust, explains, ‘In this instance, the adult has ownership of the account, but it shows the intention to go to the designee. If the child knows about the investment, they are legally allowed to apply for a transfer into their name at the age of majority. However, the adult is free to sell up and realise some or all of the investment in its entirety before that date.’

This suits parents who may be worried that once their child hits the age of 18 they may not be in a position to know how best to manage their money. If the child goes off the rails as the big day approaches, the adult can simply withdraw the money and spend it on what they think the child needs – such as a university education, or a deposit on a house.

Alternatively, the account can be set up as a bare trust. Sweeting explains, ‘This is more formal. The investment is held on behalf of a child by the donor, such as the parent. When the child reaches 18, they are entitled to have the shares moved over to their name, or the account closed. The big difference is that the money is managed by trustees, and if you want to realise the investment before they reach the age of majority, the trustees would have to be assured it was for the benefit of the child.’

Choosing the right investment
These schemes, therefore, have big attractions for parents. However, when selecting the scheme that suits you best, Gavin Haynes, investment director of Whitechurch Securities, says, ‘It comes down to the underlying investment.’

Among the most popular options for children’s savings plans is a unit trust specifically designed for this type of investment. The Invesco Perpetual Children’s Fund is a generalist unit trust, which has been mid table over the past year and above average over the slightly longer term.

But the majority of the rest are big, global growth investment trusts. In many ways, these are well suited to investing for children. Budden explains, ‘Unless you are prepared to asset allocate yourself, a generalist approach is more sensible. It diversifies risk across stocks and across regions, so you can just sit back and let
it happen.’

Darius McDermott, an adviser with Chelsea Financial Services, agrees: ‘Global growth may be appropriate because the manager has the opportunity to access growth wherever it is in the world. So, for example, last year they could have got decent returns from Asia and the emerging markets.’

At Baillie Gifford, the scheme feeds into one of eight investment trusts of your choosing. Three of these are global investment trusts. Chris Fletcher, head of retail investment, points out, ‘You can take advantage of the globalisation of investments. If you invest in a clutch of funds, each one will have a local benchmark, so even if the manager doesn’t like it, they will have some value in local heavyweights. If you are managing on a global basis, no company is big enough to matter, so the manager doesn’t have to invest in anything they don’t like.’

He points out that among the Baillie Gifford trusts, this approach has had some success in the past year. While the benchmark fell eight per cent, the Scottish Mortgage Trust returned nine per cent, Monks 12 per cent and Edinburgh Worldwide eight per cent.

A global approach
Many of these global growth funds are very large. Some of them have been around for a century or more and have built significant holdings. This means the charges are spread over more investors, and you end up paying less. For Witan and Scottish Mortgage, for example, the total expense ratio is 0.5 per cent. For the Scottish Investment Trust, Sweeting explains, ‘There is no initial plan charge other than stamp duty, and no annual management charge. The only charge is £10 plus VAT to withdraw your investment.’

Some of the underlying funds have crucial differences. Witan, for example, is a multi-manager fund, with a different manager (and sometimes a different investment house) taking responsibility for each region. Budden says, ‘We are trying to bring together the best managers from around the world. It is an extra layer of diversity. It is not just across location and sector but also the manager.’

However, it is worth looking at any of these global growth funds in detail. Julie Hedge, an adviser with Christie Scotts and author of The Pocket Money Plan, says, ‘The schemes specifically set up for children are not always the best performers. Some of them haven’t got a great track record, so it’s important to investigate them thoroughly to make sure they meet your needs.’

There are alternatives beyond traditional global growth, such as the SVM savings scheme. Mark Noble, head of retail sales and marketing, explains, ‘The children’s investments go into the SVM Global Fund. It is a multi-asset fund of funds with a global investment remit. It means we can go anywhere and buy anything. We have some defensive elements to protect you on the downside and some aggressive elements for exposure to global markets, where you can make real money.’

The aggressive elements include specialist funds, resource funds and special situations funds, while the defensive elements are property, private equity and hedge structures ‘designed to give predictable returns to diminish the volatility of the overall portfolio’, according to Noble.

The fees are higher than for a typical global growth fund, but Noble explains, ‘We take performance fees of ten per cent of the outperformance of the FTSE World Index, but we have very low base fees of 65 basis points, and if we don’t perform we don’t
get the performance fee.’

Broader options
Other options include the Baillie Gifford trusts, five of which are more specialised. These include the Pacific Horizon Fund, which invests in Asia Pacific excluding Japan. Fletcher describes this as ‘more racy’. It increased 18 per cent last year and 261 per cent over the past five years, but has the potential to be just as volatile on the downside.

So there are a few options for investors who want to look beyond big global growth investment trusts. However, this variety is nothing compared to that available in the broader investment trust and unit trust market.

Hedge recommends, ‘When you’re investing for children, you should look at the whole marketplace.’ McDermott agrees, ‘I see no reason to be limited to a handful of funds branded for children rather than choosing the right one from the 2,000 available.’

Many advisers suggest that, as with any other investment, you start with
your attitude to risk, your objectives and what you have elsewhere in the portfolio. Hedge suggests, ‘If, for example, you already have a Child Trust Fund with exposure to the UK, you might look at a global fund. If this is your first investment for the child, you may want to start with the UK.’

McDermott points out that, assuming the parent’s risk profile allows for it, the fact that you are investing for such a long period means you may be able to afford to take some risk with at least part of your portfolio. He says, ‘You could consider higher-risk funds, such as global equities and emerging markets.’

Haynes says that parents are showing some appetite for higher-risk funds within their Child Trust Fund selections, so they may want to reflect this in their unit trust or investment trust choices too. He says, ‘Emerging markets certainly seem to make a lot of sense if you are investing with a ten- to 20-year view.’

Starting small
Haynes also points out that there are plenty of funds with low minimum investments, including the Invesco range, which will appeal to those planning to make regular monthly contributions without having to go to a scheme that is specifically designed for children.

Once you have chosen the most suitable investment for you, Hedge says, it is fairly simple to set it up a bare trust for your child. It is something investment companies are very familiar with.

However, as with any investment, it is vital that you revisit it regularly. You may
have selected a fund that you understand may be fairly volatile over the short term, on the proviso that it should do well over the longer term. However, McDermott says, ‘It doesn’t mean you shouldn’t check once a year that the fund is doing what you expect.’ And if it isn’t, you should consider moving it.

Even if the fund you select does exactly what you want it to, you should consider gradually switching assets as you near the end of your investment period. Haynes
says, ‘If you are saving for a predetermined goal, then in the final five years of your investment period you probably want to lower the risk profile of these investments.’ This could mean switching from something like emerging markets into UK equities, bonds, property and cash, so that there is less risk of sudden volatility in the months immediately before you plan to withdraw the money.

If you pick the right fund, whether it is inside a children’s savings plan or outside, and make regular contributions to it, you can make a massive difference to your child when the investment matures. You can give them the potential to be whatever they want when they grow up – unless they wanted to be a struggling artist, of course.