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Best in Class: Fund for the next generation

Best in Class: Fund for the next generation

It’s half term this week for many people, which generally means either a family holiday, school holiday clubs, or lots of days out. Either way it’s safe to say a lot of money is no doubt being spent on kids. Therefore, I thought I’d use this rather tenuous link to talk about doing exactly the opposite: where to invest for children. 

It is Isa season after all, and it’s as good a time as any to remind clients that they can invest directly for their children or grandchildren, as well as for themselves. 

In our monthly poll last November, we asked FundCalibre visitors: “What’s the best way to save for a child?” The response was overwhelmingly a Junior Isa stocks and shares account at 87 per cent.

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But where to invest the Junior Isa allowance? One thing I’ve noticed over the years is that investors tend to take more risk when it comes to Junior Isas than they do when investing their own Isa allowance. So what may be a satellite investment for an adult can easily be a core investment for a child. 

I really like smaller companies funds as a core holding for a Junior Isa and there is a lot going for the small-cap end of global markets at present. A number of fund managers I’ve met recently are very keen on Asian smaller companies in particular. Valuations post the ‘Trump trade’ are looking attractive and there is potential for a pick-up in domestic Asian spending, with a discarded Trans-Pacific Partnership trade agreement possibly leading to business being done more locally instead. 

Speaking of Donald Trump, his widely anticipated corporate tax reform is unlikely to do much for US large caps as most pay a lower rate anyway. US small caps on the other hand could benefit greatly. And closer to home, UK micro caps in particular are trading at very low and compelling valuations. 

A fund that can incorporate all these ideas is Baillie Gifford Global Discovery. Renowned for the quality of its in-house research, Baillie Gifford brought its small-cap teams together in 2011 to form the global discovery team, and this fund is perhaps the purest embodiment of the Scottish investment house’s growth philosophy. In essence, it invests in companies the team believes to be the most innovative and fast-growing around the globe. 

Led by Douglas Brodie, the team takes an unusual approach when looking for these investments. It doesn’t use generic screens to create lists of potential stocks, nor does it use broker research. Instead, the team thinks about the kinds of firms it would like to invest in, the long-term thematic influences, and undertakes fundamental stock research to find opportunities. Each member of the team has expertise in areas outside of finance so that they can truly understand their companies. 

To mitigate some of the risks involved in holding such small, and sometimes early-stage businesses, the portfolio will invest in around 75 to 150 stocks, while no less than six different regions are represented at any given time, ensuring sufficient diversification.

This fund has a firm eye on the future. It seeks to invest in companies that are capable of ‘changing the world’ – something most young people dream of doing and an aspect that may resonate well with them when they take control of their pot of money at age 18.