Why use investment trusts when saving for children?

I have given all my grandchildren shares in Law Debenture – not just because I manage the money and believe in the strategy but because I think investment trusts are a great vehicle for long-term investing for younger people.

Here are a few reasons why I like them.

Oversight

Investment trusts have a board of directors who act in the interests of shareholders. I may not be managing this money in 18 years’ time, but I hope my colleague Laura Foll will. If not, I know the directors will be looking after my grandchildren’s interests and holding to account anyone who is, as Laura and I are held to account today.

Gearing

Investment trusts can provide greater returns for long-term investors, thanks to their ability to use gearing. This means the managers can borrow money to invest alongside capital raised from selling shares. While it can increase the volatility of an investment, gearing can provide a powerful boost to returns during periods of strong growth.

Costs

The management fees for investment trusts are also often lower than for actively managed funds – perhaps down to those boards of directors haggling! And on some popular platforms, if you have sufficient wealth, the platform fees can be lower if you invest in investment trusts than they are for funds.

These differences may be marginal in the short term, but they can make a significant difference over time.

How to invest

Investing large lump sums can reduce the amount you lose to trading fees, but this option is not realistic for all investors. For those wanting to invest little and often, some platforms will waive these fees for clients who set up a direct debit of as little as £25 a month. As well as taking some of the thinking out of the process – the money is invested every month without you having to remember – this strategy takes some of the risk out of timing your investment. By investing regularly regardless of market conditions, you mitigate the impact of short-term volatility by averaging out the price you pay over time.

Sensible saving

With the ISA season upon us, it is a good time to think about using ISA allowances. I am not a financial planner, but if you are confident of long-term growth then it makes sense to invest within a tax ‘wrapper’ that allows your investments to grow free of capital gains tax. Once a parent has set up an ISA account for a child, any UK tax resident can pay into it, including grandparents, up to an annual limit of £9,000. Ask your adviser for more information.

Make sure to tick the box to have income automatically reinvested. Many older investors like Law Debenture for the income it provides, but reinvesting that income helps growth compound if you are saving for the long term. You can see this if you look at the numbers. £1,000 invested in Law Debenture 18 years ago would now be worth £3,584 if you had taken the income and £7,127 if it was reinvested*.

Investing for adult children

Of course, it is not just young children who can benefit from investment trusts. Changes to inheritance tax (IHT) rules on pensions and the impact of IHT tax allowance freezes are encouraging many of us older savers to start passing money down the generations earlier than we might. I have also given gifts of Law Debenture shares to my two children, who are in their 20s and 30s. I have a lot of faith in the management strategies we are using to manage Law Debenture, and I believe that investing this way will be for their long-term benefit, too.

*Source: Morningstar

James Henderson is manager of the Law Debenture Investment Trust, alongside Laura Foll. 

Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. The information does not qualify as an investment recommendation. Capital at risk.
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