Investing for the Grandchildren

Many parents and grandparents like the idea of saving for children/grandchildren. A couple of years back I earmarked an investment into the Vanguard Lifestrategy 80 fund for (then) three grandchildren. 

However since then the number has grown to five and as I will soon become a pensioner, I have been considering siphoning off some of the state pension via a monthly drip-feed into a long term savings plan via one of the global investment trusts. 

I have been doing a little research in recent months looking at the various options. The traditional options include Aberdeen who recently merged with Standard Life and offer a plan with a min. £30/month regular and £150 lump sum however, their flagship option of Murray International has not been performing so well in recent years and therefore I decided to pass. There is also F&C with a min. £25/month but £250 initial lump sum and then the annual charge of £30 and also dealing fees which would not work for me. I also looked at Baillie Gifford which runs my Scottish Mortgage holding.

The 5 grandchildren aged between 9 months and 6 yrs and I want to put aside a regular monthly amount with the option of adding the odd lump sum amount from time to time. I am fairly traditional 'old school' when it comes to money and remember what I was like at the age of 17 or 18 yrs and what I may well have done with a large sum of money at a young age. I therefore want some control over the account as I would like them to have the money a little later, maybe at the age of 21 yrs (earliest) rather than 16 or 18. This rules out a few options such as junior ISAs and bare trusts set up in the children's own name.

In the end I decided to open a children's savings plan with Baillie Gifford as I believe the Scottish Mortgage trust probably offers the best long term growth prospects combined with the lowest costs.

The plan is in my name with the grandchildren all named as designated beneficiaries. The plan offers a low cost way of saving via a range of investment trusts.

There are 4 global trusts :

Scottish Mortgage

Monks

Scottish American

Edinburgh Worldwide

and 3 trusts which focus on the Far East:

Baillie Gifford Japan

Baillie Gifford Shin Nippon

Pacific Horizon

Flexible

The plan will run for the next 20 years or so and over this time-frame I am obviously looking at global growth.

Although I am starting with the one investment trust, I do have the option to split my monthly contributions between two or more trusts. The minimum is £25 for each trust and there is the option for a lump sum addition into any trust - min £100.

The Trust Choice

To start off I have selected the Scottish Mortgage trust as this is the largest global trust with the lowest ongoing charges. I am obviously familiar with SMT as I hold it in my own SIPP and ISA. 

The managers have a good reputation for consistent performance in areas which I believe will provide a good chance of out-performance over the coming years. It has turned £1,000 into £4,350 over the past 10 years which equates to an average of over 15% per year. At this rate, an annual contribution of £1,000 over 20 years would grow to just over £100,000. If it can deliver anything near this over the coming 15 to 20 years my grandchildren will have a tidy sum in the region of £20,000 each - fingers crossed.

Charges

For the best long-term returns, it is important to ensure the costs of the investment are low. This is one of the reasons the low cost index funds generally out perform the more expensive managed funds. The big advantage of the savings plan is there are no platform charges from Baillie Gifford and also no transaction charges for the purchase of shares which is important when a monthly drip-feed plan is operating. 

Therefore the only charges will be the ongoing charges for the Scottish Mortgage trust of 0.44%. This puts it on a par with the likes of holding Vanguard Lifestrategy with ongoing charges of 0.22% combined with platform charges of 0.15% (Vanguard Investor) or 0.25% (AJ Bell Youinvest).

There is however a charge of £22 for each withdrawal but as I am not planning on this for many years it should not be a problem.

For anyone interested in exploring the investment options in more detail here is a link to their savings plan (pdf).

Feel free to comment if you are currently saving for children or grandchildren and share your experience with others.

Mid Wynd Trust - New Purchase

This global investment trust has been on my watchlist for some time as it offers exposure to some areas of potential such as robotics and immunology which I hope will provide some good prospects for growth over the coming decade. 

The recent pull-back in the markets has provided an opportunity to add the trust to my portfolio to sit alongside Scottish Mortgage as a long term growth play. However, at the current price of 474p, the market value of the trust is only £165m compared to £6.5bn for SMT.

Mid Wynd International is a theme-based global investment trust. Artemis took over the management of from rival investment house Baillie Gifford in spring 2014 after long standing manager Michael MacPhee retired. During this period the share price has increased from 275p to 475p - up 72% and the dividend is up 34% from 3.8p to currently 5.1p.

The management team led by Simon Edelsten have built a portfolio of high-quality holdings which focus on a number of trends which offer the prospect of long term growth. This approach is combined with the strategy of value investing which means a disciplined assessment of price to maximise value for money. Obviously there are many options to choose from in any particular theme. The management select from companies with a good record on profitability, good cash generation, a strong balance sheet and identify those which offer a significant barrier to entry for competitors.

The strategy is to hold around 60 - 70 holdings between 8 to 10 themes. Each individual holding is limited to a maximum of 3% of the total portfolio.

Last year the managers decided to offload their shares in Amazon after a very good run and switched the proceeds into Japans tech stocks Nabtesco, Daifuku and Yaskawa. Here's an article on AIC which gives more background.

3 year comparison v Scottish Mortgage
(click to enlarge)

Current themes include Automation/Robots 21%, Emerging Market Consumer 14%, Tourism 13%, Healthcare & Immunology 10%, Online Services 10% and Scientific Equipment 9%.

The main areas for global investments are USA 42%, Europe 21%, Japan 17% and Emerging Markets 14%.

The trust has management charges of 0.5% and ongoing charges are 0.67%. Over the past year the company have paid total dividends of 5.1p which gives a current yield of just over 1.0%.

The manager Edelsten and chairman Malcolm Scott QC both have a significant personal holding in the trust which I always attach importance to when considering a purchase as the interests of management and investors are aligned. Interesting that the largest shareholding is held by Alliance Trust from the same global growth sector.

The disciplined investment process and portfolio construction has provided a decent return averaging around 14% p.a. since the team took over from Baillie Gifford...fingers crossed this can continue for me.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

Collectives Portfolio - Easter 2018 Update

It's a wet and unseasonably cool Easter Monday so a perfect opportunity to stay home and catch up on the blog. There have been a couple of changes to the portfolio since my update last October so I will take this opportunity to bring things up to date.

Although this is demonstration portfolio, it largely mirrors my own holdings.

Portfolio Changes

The markets have seen a little more volatility in recent weeks which feels more familiar compared to the month-on-month rises throughout the whole of 2017. There was a significant pull back towards the end of February and a similar downturn in March - we are back to the rollercoaster for a while it seems. The FTSE 100 is down -8.2% over the past 3 months.

As this period saw a strengthening pound, rising above $1.40, I took the opportunity to reinvest some of the cash which has been sitting on the sidelines over the past 12 months or so.

In addition, at the start of the year I sold some of my Vanguard UK income fund as I am looking to reduce equities a little generally and UK in particular and also adjust the allocation towards a more globally diverse mix and introduce a wider variety of assets. The proceeds from the UK income fund have therefore been divided between HSBC Global Strategy Balanced fund and also Royal London Sustainable Managed Growth.

I have taken some of the cash to purchase a new holding in Vanguard Lifestrategy 40 with the Vanguard Investor platform. I have also added Kames Diversified Income and, most recently Scottish Mortgage (which I also acquired for my SIPP last year).

My demonstration portfolio has now been running for over 5 years. There have been a few more changes than I would ideally like and, looking at the portfolio, there are probably a few too many holdings and I will be looking to reduce and simplify at some point.


Returns

Many of my holdings have lost ground in recent weeks. My investment trusts have retreated by an average of 5.0% over the year to-date and my largest holding with Vanguard Lifestrategy 60 faring a little better, down 3.5%.

Since the start of 2018, the FTSE All Share index is down 6.9% (total return) and the global markets are down 4.4% adjusted for sterling exchange.

There has therefore been little progress over the past few months with the portfolio treading water. The value of the combined portfolios at the time of the last update in October 2017 was £93,679 compared to the current value of £92,493 taking account of income withdrawn.

Income

Last year the portfolio generated a natural income of £1,899 and also I took £1,200 from cash on the sidelines to save selling units from my VLS 60 fund. This makes a drawdown of 3.6% of the current value or 4.8% of the original starting value in 2013.

Here is the combined portfolio

(click to enlarge)

Last October there was over £21,000 in cash however much of this has recently been reinvested. The Lifestrategy funds (60 & 40) now account for 36% of the total, UK income funds a further 21%, Corporate Bonds around 10%, Property/Infrastucture 8%, Mixed Asset funds are around 21% and global growth in the form of Scottish Mortgage 4%.

There remains just over £5,000 in cash awaiting reinvestment plus my Vanguard cash buffer of £3,400.

My aim with the portfolio is to generate an average return which is significantly better than the return from my building society and also ahead of inflation - currently the rates are 1.25% from the Coventry (reduced from 1.4% grrrr) and 3.0% respectively.

The average annualised return for this demonstration portfolio after 5.3 years is ~8.0% - down a little on last year partly due to cash on the sidelines delivering no return for the portfolio. However, it continues to deliver the income I require of around 4% each year plus a little capital appreciation on top - so far, so good...

If you have any thoughts on the portfolio, feel free to leave a comment below.

City Merchants Trust - Full Year Results

The stock market essentially deals in two kinds of asset; shares and bonds. These investments have very different characteristics; shares make you a part-owner whilst bonds, being debt instruments, turn you into a lender.

They say shares are for optimists, bonds are for pessimists. I have become a little less optimistic on equities over the past year which is why I have reduced the mix to 50:50 (from 60:40 previously).

Similar to my other holding in this sector, City Merchants investment objective is to seek to obtain both high income and capital growth from investment, predominantly in fixed-interest securities.

It is almost three years since I purchased this IT for my ISA as a replacement for a few sales from my shares portfolio.

The overall portfolio is fairly defensive with a significant proportion of higher quality companies which the management consider to be ‘default-remote’.

Results

They have this week announced results for the 12 months to 31st December 2017 (link via Investegate).

Net assets have steadily increased over the year and taking the full year dividend of 10p per share into account, the total return was 9.9% (2016 11.6%). Over the past 5 years, the return has been 49.7%.

CMHY 3 Year Share Price (click to enlarge)

Dividends

The dividend target for the trust is 10p per share paid quarterly. This amount was paid in each of the previous four years and remains the target for the coming 12 months. At the current price of 177p the shares offer a yield of 5.6% which is obviously attractive compared to the rates on offer from our banks and building societies. The average cash ISA rates are starting to increase but only offer a miserly 1.2% according to latest figures from Moneyfacts. In 2007, the average rate was 5.0%.

Of course, the share price will move around as can be seen from the chart. In recent weeks there has been some weakness and the share price has moved from a 2% premium to an 6% discount which has resulted in the yield becoming more attractive.

Regardless of the share price fluctuation, the trust provides some diversity to equities and a steady and predictable quarterly income stream for my portfolio.

Finally, this article is a record of my personal investment thoughts/decisions and is not a recommendation - as always, please DYOR.