Junior ISA

Making full use of your child’s Junior ISA allowance could give them a huge advantage in later life. Most of us missed out on the chance to invest through our first 18 years through no fault of our own. Smart parents are now realising the value of investing over this long time period and making investments on their child’s behalf.  

A Junior ISA is much like the regular ISA and has the advantage of no capital gains tax and no further liability to income tax. However, unlike a regular ISA, you can't take any money out until the child becomes 18. The Junior ISA is then automatically rolled into an 'adult' ISA.

A long time horizon is so important when investing because it allows the magic of compound interest to take effect. Compound interest is simply 'interest on interest'. A small investment can grow to a large sum when untouched and with all income re-invested.

Because the Junior ISA can't be touched for up to 18 years, some investors feel more comfortable being aggressive with their fund selections. It's very unlikely that stocks will underperform bonds or cash over such a long time period. Here are a list of the top 10 funds invested in Junior ISAs by Chelsea clients*:

1. Newton Asian Income Fund
2. Liontrust Special Situations Fund
3. Rathbone Global Opportunities
4. M&G Global Dividend Fund
5. Marlborough Special Situations Fund
6. M&G Global Emerging Markets Fund
7. CF Woodford Equity Income Fund
8. Aberdeen Emerging Markets Equity Fund
9. M&G Global Basics Fund
10. HSBC Open Global Return Fund

Newton Asian Income
Jason Pidcock joined Newton in 2004 and was instrumental in the launch of the Asian Income fund in 2005. The small Asia Pacific team is supported by Newton's global sector team which is made up of more than 20 analysts. The fund follows a thematic approach and aims to identify key structural changes in the global economy which form the basis for its investments. Jason invests in companies across the market-cap range, with strong fundamentals and with an above-market yield at purchase. Should a stock's dividend yield fall too far below the market's average yield, either through share price appreciation or through a dividend cut, it will be sold from the portfolio. Jason is a long-term investor and the fund has a low turnover.  Over 40% of the fund is currently invested in Australia and New Zealand, the most developed part of the Asia Pacific region, and as a result the fund is typically less volatile than the index and most peers. The fund has been a very strong performer, returning 71.50% versus 33.32% for the sector average over the past five years.^

Liontrust Special Situations
Anthony Cross has honed his investment process over a 20 year period. In 1997 he published the Cross report which forms the blueprint of the funds investment strategy. The fund invests in quality companies with a durable competitive advantage that enables them to sustain a higher than average level of profitability. In 2008 Anthony was joined by co-manager Julian Fosh who also has a superb long-term track record, having previously worked at Saracen fund managers. This is an unconstrained “go anywhere” fund which will invest in its highest conviction ideas regardless of the company's size. Over the past five years the fund has easily beaten the market, returning 115.73% versus just 50.50% for the FTSE All Share.^

Rathbone Global Opportunities
Manager James Thomson adopts a bottom-up, contrarian philosophy. He buys out of favour growth companies. The fund is unconstrained but typically invests very little in emerging markets as James does not feel this is his area of expertise. James finds many of his best ideas in mid-cap companies which still have room for growth. This is a truly unconstrained growth fund run by an experienced manager with an excellent track record. Over five years the fund has returned 73.54% versus just 46.93% for the IA Global Sector.^

Three high growth, high risk funds for long-term investors
If you are investing for a child from birth you can invest in the knowledge that the money can't be touched for another 18 years. When investing over such a long time period, if you're comfortable with the volatility, you may decide to make some riskier investments with the potential for higher returns. Below are three small under-the-radar funds which invest in the growth parts of the world and have been racking up big performance numbers.

Schroder Small Cap Discovery
This relatively new fund was launched in 2012. It invests in small companies in emerging markets, although it has a very heavy bias to Asia. It is run by Matthew Dobbs and Richard Sennitt who together have over 50 years experience investing in the region. Many of the companies in the fund's universe will have little or no research coverage. That provides many opportunities for Schroder's numerous analysts to take advantage of inefficiencies in the market.

At just £98m, the fund is relatively small which gives it the freedom to move in and out of its positions quickly, an important advantage for a smaller companies fund.

This fund is bound to be volatile; both smaller companies and emerging markets should be considered high risk areas, but they should hopefully grow faster as well. Thus far the fund has already returned 39.88% in three years, whilst the IA Global Emerging Markets sector was flat. The fund has about 80% invested in Asia and should do well if Asia continues to power the world economy.^

JOHCM Asia ex Japan Small and Mid Cap
Cho-Yu Kooi and Samir Mehta run this unconstrained portfolio. The two experienced managers have worked together for 15 years. They argue that if you want emerging market exposure you should be looking at Asia. Asia is where the consumer is and stands to benefit the most from falling oil and commodity prices.

The managers look for quality companies which are sustainable in tough cyclical markets. Capital preservation is an important starting point and the managers do a lot of research into how companies performed in previous downturns. They aim to invest in small businesses which have 'scalability' and can potentially grow to become much larger in the future.

85% of the portfolio is made up of core solid holdings; cyclical companies usually make up the remaining 15%. The fund currently has an enormous 31% overweight to India and the managers are not afraid to make big allocations to certain countries or sectors. At just £19m in size this fund has the ability to reposition itself very quickly if it needs to, although traditionally the managers aim to invest for the long term.

The fund should be considered high risk. It is investing in volatile, smaller companies in an emerging part of the world. The fund has had an incredible past year, beating its benchmark by 23.29%. Over three years it has returned 51.85%, versus just 14.63% for its index, after all fees.^ This is all the more impressive since the fund charges a 15% performance fee on any excess performance above its benchmark. If you want an unconstrained fund which is close to the Asian consumer this may be worth considering.

Jupiter India
Avinash Vazirini has almost 20 years experience managing Indian equities. He runs a high conviction portfolio and is prepared to deviate away from the index. Despite a very strong run for Indian equities over the past year, Avinash believes the Indian economy may be at a turning point. Falling inflation, lower oil prices and new reform measures have all been major positives for the economy. Avinash correctly predicted the surprise interest rate cuts the Indian central bank introduced at the start of this month. All this has helped the fund return an exceptional 70.11% versus 45.58% for the index, over just the past year.^  

Avinash employs a GARP (Growth at Reasonable Price) approach and typically invests in high-quality companies across the market-cap spectrum. The fund's high conviction, single country focus and mid and small-cap bias can lead to it being very volatile. Only investors able to stomach large short-term losses should consider investing. That said, India is becoming an increasingly important part of the global economy and long-term investors may want to consider some exposure.

The current allowance for the Junior ISA is £4,000, increasing to £4,080 for the 2015/16 tax year. £4,000 is a lot to save every year, particularly if you have a number of children but even regular small investments can really grow. £50 a month over 18 years would grow to £21,165 at a 7% interest rate.**

Start investing for your children now, they'll thank you later.

Click here to watch our video on Junior ISAs

*as at 12th March 2015
^FE Analytics 16/03/2015
**http://www.moneychimp.com/calculator/compound_interest_calculator.htm