Generation game
Why Ian Cowie is using investment trusts to save for his grandchildren
Nearly 10.6m children will go back to school and 2.9m students will return to university this month, prompting many parents and grandparents to consider how we are going to help pay for it all. As I know from personal experience, the cost of an education can be substantial – often exceeding what older generations spent on our mortgages – and fees are rising fast.
Fortunately, funding education has several similarities with passing exams. The sooner you start to prepare for the challenges ahead, swapping anxiety for action with a plan you can put into effect, the greater your chances of success.
“Nearly 10.6m children will go back to school and 2.9m students will return to university this month, prompting many parents and grandparents to consider how we are going to help pay for it all.”
To be specific, where you have five years or more before you want to pay school fees or university costs, and you are willing to accept the risk that share prices can fall without warning, then stock markets are likely to beat cash savings. That assertion is based on analysis of returns from different assets since 1899, annually updated in the Barclays Equity Gilt Study, which shows an historic probability of shares beating cash deposits over three quarters of all periods of five consecutive years during the last 126 years.
To be precise, shares reflecting the changing composition of the London Stock Exchange (LSE) beat cash in 77% of five-year periods since 1899. Over ten consecutive years, shares delivered bigger returns than cash 91% of the time. It is important to be aware that the past is not necessarily a guide to the future. But it is an historical fact that the century and a quarter being analysed included the Great Depression plus both World Wars.
Those odds were good enough for me to favour shares over bank and building society deposits for my son and my three grandchildren. In each case, to diminish the risk of stock market returns disappointing, I chose professionally managed and widely diversified pooled funds in the form of long-established global investment trusts.
There are hundreds to choose from but the three funds I selected were F&C Investment Trust (stock market ticker: FCIT), Scottish Mortgage (SMT) and Alliance Witan (ALW). They have been listed on the LSE since 1868, 1888 and 1909 respectively.
“There are hundreds to choose from but the three funds I selected were F&C Investment Trust, (stock market ticker: FCIT), Scottish Mortgage (SMT) and Alliance Witan (ALW).”
That means they managed to trade through all the historic disasters mentioned earlier, which may put our current worries in perspective. This is not a guarantee but is evidence of an ability to survive serious setbacks. That’s important when we are investing to fund educational ambitions which must not be disappointed.
While income is scarcely an issue for young dependants, it is also worth mentioning that the three investment trusts I chose for my son and grandchildren also increased their dividends every year for several decades. FCIT has done so for the last 55 years; SMT did so for 44 years and ALW has increased shareholders’ income for 59 years without fail.
Without wishing to get bogged down in technical details, all these investment trusts utilised their closed-ended structure to sustain rising income over recent decades which also included several stock market slumps and violent conflicts. No open-ended fund, such as any unit trust or exchange traded fund (ETF), can match the sustained income increases which earned all three of these investment trusts the AIC accolade of ‘dividend heroes’.
Looking forward, these investment trusts’ underlying assets include exposure to world-leading businesses. FCIT’s top holding is the microchip maker Nvidia, and its top ten assets also include the iPhone maker, Apple. Over a quarter of SMT’s net asset value (NAV) is invested in the rockets to satellites giant, Space Exploration Technologies or SpaceX. Meanwhile, ALW’s top three holdings are the software giant Microsoft, the online retailer Amazon, and the credit card company Mastercard.
As a result, despite their long histories of surviving economic and geopolitical crises even greater than those seen today, these investment trusts have delivered positive returns over the last decade, five-year and one-year periods. SMT leads the AIC Global sector over the last decade and one-year periods, while FCIT is the leader over five years.
“No open-ended fund, such as any unit trust or exchange traded fund (ETF), can match the sustained income increases which earned all three of these investment trusts the AIC accolade of ‘dividend heroes’.”
However, trying to maximise returns is not the only consideration when aiming to help with educational costs; risk reduction and reliability are important, too. Another consideration is inheritance tax (IHT), which is due to be extended to pension assets next April, even before the Budget due on 28 October.
Grandparents, like me, should be particularly mindful of the annual allowance to give away up to £3,000 exempt from IHT – as well as remembering that gifts of any value made more than seven years before the donor’s death are entirely IHT-free. That’s a powerful incentive to give with warm hands, earlier rather than later. So the sooner we get down to the homework of investing to fund education, the better.
If you would like to know more about Ian Cowie's top 10 investment trusts by value and his other experiences on the stock market, see iancowie.co.uk
