Any parents looking forward to recovering some financial equilibrium having waved their children off into the big wide world will have greeted a new report from friendly society LV= (formerly Liverpool Victoria), with some dismay. Not content with school fees, university fees and other day-to-day expenses, apparently adult children now
soak up an average of £21,540 from their long-suffering and cash-strapped parents.

The report served to reinforce an obvious conclusion: children are expensive. Most parents will not have to be reminded of the importance of saving for children and it seems in these straightened times, children’s saving is proving resilient. Unsurprisingly, it is one of the last expenses a family will cut.

David White, chairman of the Children’s Savings Advisory Council at the Tax Incentivised Savings Association (TISA), says, ‘There are no signs yet that the credit crunch has affected the children’s savings market. The number of accounts being opened and the level of direct debits have stayed at pre-credit crunch levels.’

Staying with shares
And the credit crunch has, as yet, also had little impact on the way people invest. White says that there has been no evidence that people have moved towards cash investments. He says, ‘People are broadly happy with the idea that this is going to be a
long-term investment.’

Many parents seem to have absorbed the message that equities outperform over the longer term. Sherry-Ann Sweeting, marketing manager of the Scottish Investment Trust, says, ‘The 2008 Barclays Equity-Gilt study reinforced that, over an 18-year period, equities will outperform cash on 99 per cent of occasions. Building societies don’t have the vagaries of the stock market to contend with, but investors need to know that interest rates will keep up with inflation. Like anyone, children should have a balanced portfolio.’

With food and energy costs soaring, retaining the purchasing power of investments made for children has become even more important. Expenses incurred on behalf of children have already borne the brunt of inflation – for example, private school fees have risen at around six per cent per year, well above the wider inflation rate.

A solid foundation
Investment trusts (ITs) remain one of the most popular equity-based investments for children. They have some inherent advantages. They tend to be cheaper than other forms of collective equity investment. A typical investment trust will have no initial charge and an annual management charge of between 0.5 and one per cent. Also, they are accessible. Investors can buy in at a low minimum investment level – often as low as £25 per month.

It is the large, generalist, Global Growth funds that have traditionally been used for children’s savings. They provide a diversified basket of shares, invested across sectors and regions, which gives a handy ‘one-stop shop’. F&C and Witan provide child trust fund wrappers and for the most part, the remaining members of this group have convenient packaged children’s savings schemes.

However, they have suffered from the ‘giant panda’ syndrome – only other giant pandas can tell them apart. For years, they were all benchmarked to similar indices and all invested in a similar way. As a result, performance lacked punch. But James Budden, marketing director at Witan says that times have changed in the sector.

‘There was a big shake-out during the technology boom and bust. The global investment trusts realised they have to differentiate from one another and offer something different. The trusts in the sector are now a widespread bunch.’

Witan adopted a multi-manager approach in 2004. It follows a standard benchmark of 40 per cent UK, 20 per cent Europe, 20 per cent US and 20 per cent Asia/rest of the world, and will make tactical bets against these benchmark weightings in order to add value. In determining those tactical weightings, investment manager Jim Horsburgh takes guidance from the underlying managers.

Making the right moves
However, Witan still considers itself a stockpicking fund rather than an asset allocation fund. For the most part, the trust takes a ‘manager of managers’ approach. It gives select managers a pot of money to manage on a segregated basis. For example, Derek Stuart at Artemis, currently manages a £75 million UK mandate for the group. Other managers include Southeastern and Thomas White in the US, and Brandes in Japan.

It uses an ‘enhanced index’ approach for around 20 per cent of its holdings. As yet, this has produced middling rather, than exciting performance, but there is hope that the recent appointment of Mark Lynam as chief investment officer, following Jim Horsburgh’s impending retirement, may propel the trust higher.

The other trust that uses similar multi-manager techniques, at least for part of its portfolio, is the Foreign & Colonial Investment Trust. Portfolio manager Jeremy Tigue says that, while the default position is to manage the money in-house, the trust now uses a number of external managers. ‘You pay more to go externally, so we have to ensure that any external manager is providing us with returns of around one per cent more per year. We currently outsource in the US and Japan, but elsewhere we have no reason to do so.’

The trust takes short-term tactical asset allocation positions of one to two per cent above, or below, the benchmark, but every five years or so, it will make a major strategic shift. The last of these shifts was to take large positions in emerging markets and private equity. The group took its emerging markets exposure from five per cent to 18 per cent.

It invests in private equity through limited partnerships. Foreign & Colonial is sticking with this position, despite recent problems in the private equity market. Tigue says, ‘We think it will go through a difficult time in the second half of this year, but over the market cycle it will continue to produce strong returns. The private equity portion of our portfolios is even more diversified than the quoted investments and will include Asia, emerging markets, mezzanine or distressed debt.’

A range of approaches
This is the only significant holding in ‘alternatives’ for Foreign & Colonial, though it does hold two listed hedge funds. Witan also has an allocation to alternatives, but most of the remaining global growth trusts aim to generate returns purely through the equity markets.

Other trusts in the sector have also gone through changes. The Scottish Investment Trust, for example, now invests in fewer stocks and the group’s in-house managers are less benchmark-constrained. Sweeting says the fund’s benchmark remains 50 per cent UK and 50 per cent Global but adds, ‘We have given the managers greater flexibility and freedom – for example, they don’t have to hold an oil stock if they don’t like it. Equally, if they don’t like UK or European oil stocks, they can solely invest in, say, Canadian oil.’

The trust generates its returns through bottom-up stock selection rather than taking asset allocation positions.

Scottish Mortgage also cut its total holdings, from around 350 to 75, reducing its UK position to around 15 per cent of the portfolio and taking a larger position in ‘new world’ growth areas, such as the Brazil, Russia, India, China (BRIC) economies. While Alliance Trust has taken a different approach, aiming to build a wider financial services business.

Of the large global growth trusts, the top performers over three years remain those run by Baillie Gifford – Scottish Mortgage and Monks. Scottish Mortgage has delivered a total return of 58.06 per cent and Monks 55.0 per cent, leaving them first and second in the sector (out of 35 funds). Foreign & Colonial remains a consistently good performer – it is tenth over three years, having delivered 38.86 per cent. 

The Scottish Investment Trust and Witan are both mid-table, having delivered 32.93 per cent and 21.76 per cent over the same period respectively. Some of the more exciting growth has come from smaller, more dynamic funds such as Jupiter Primadona Growth and the SVM Global fund. These are less obvious choices for children’s saving, but are run by capable managers and performed well over the long term.

Although it is the Global Growth investment trust sector that is most commonly used for children’s savings products, parents have 18 years to ride out market volatility and should be taking into account how the investment landscape may change.

For example, it is now widely predicted that China will overtake the US as the world’s largest economy sometime in the next ten years. Russia and Brazil are growing rich on the back of huge oil reserves and India is showing strong year-on-year growth. ITs remain one of the best ways to manage less liquid investments because fund managers do not have to buy and sell holdings when there are redemptions in the fund as for an open-ended fund. This approach will suit, say, an emerging markets portfolio.

There are a number of ways investors can access this type of investment trust within a children’s savings structure. Some groups, like Aberdeen, offer a children’s savings structure across their investment trust range. Investors can, therefore, invest directly with the fund management group. The Association  of Investment Companies (AIC), produces a free factsheet detailing such schemes (tel 0800 085 8520 or visit www.theaic.co.uk).

Alternatively, they can access it through structures like that offered  by the Share Centre. Its non-stakeholder CTF product gives a flexible investment choice, including 4,000 shares, collectives and  exchange-traded funds with a minimum investment is £10
per month.

Consider the risks
However, Andy Cowan, head of private clients at wealth advisers Towry Law, says it is important to look at the family’s tolerance to risk as well as what is theoretically ‘best’ over the long term. ‘Is a parent or grandparent prepared to adopt significant risk – even in the shorter term – with funds set aside for their children or grandchildren? The short-term tolerance to loss and exposure to risk is crucially important. How would a grandparent feel if the fund for little Johnny lost 60 per cent in a year and was being told “But remember, this is a long-term strategy”?’

He adds, ‘Furthermore, to add to concerns about risk, the investment trust, as a trading company, can borrow to invest. While this is often trumpeted as an advantage, does granny or granddad really appreciate the extra risk they might be taking with the money?’ Cowan believes that for larger sums a good quality, properly managed multi-asset class portfolio may be the right approach.

ITs have some obvious advantages when investing for children. Amongst the more broadly based, generalist trusts, investors also now have a far wider choice as the sector has become less homogenous. But 18 years is a long time horizon and parents should ensure they make the most of it so it may well be worth considering higher risk investment trusts alongside more traditional children’s investments.