- 14 funds and 22 investment trusts would have turned investors into ISA millionaires, based on investing a full ISA allowance since 1999
- A regular annual investment in Scottish Mortgage would now be worth £1.8 million
- UK Smaller Companies have held their own against US and technology strategies
- The average fund would have produced an ISA value of £601,359, the average trust would have produced an ISA value of £762,443
- Why investment trusts have done better than open-ended funds
- If the ISA allowance had been £20,000 since 1999, 70% of funds and 86% of trusts would have performed well enough to turn investors into ISA millionaires
Laith Khalaf, head of investment analysis, AJ Bell:
“Becoming an ISA millionaire requires a steadfast commitment to making the most of your ISA allowance each year, but you also need to invest your money wisely. Only 14 funds and 22 investment trusts would have made you an ISA millionaire if you had invested your full ISA allowance year in, year out, since 1999. That equates to just 4% of funds and 17% of trusts which have been around all that time.
“US and technology-heavy funds have led the pack, with Baillie Gifford topping the list of both best-performing funds and trusts. An annual ISA investment in Scottish Mortgage investment trust would now be worth £1.8 million, despite a rocky start to the year for the UK’s largest investment trust. Smaller companies funds and trusts, in particular in the UK, also feature heavily in the list of investments which would have made you an ISA millionaire. The minnows of the stock market do lend themselves to a bumpier ride than their blue chip cousins, but they should also deliver better returns in the long run, especially if part of an active fund run by a skilful fund manager, who can pick out the hidden gems.
“Although only a relatively small proportion of funds and trusts would have performed well enough to turn their investors into ISA millionaires, those who have diligently invested their full ISA allowance since 1999 would still be sitting pretty, even if they chose other investments. The total of £263,440 saved into ISAs over the years would now be worth £601,359 if invested in the average fund, and £762,443 if invested in the average trust with a performance record stretching back to 1999.
“Based on these figures one might conclude that investment trusts have performed better than open-ended funds over this period, and on average, they have. But that doesn’t tell the whole story. Unlike funds, trusts are able to borrow money to invest, which amplifies gains in rising markets, but also exacerbates losses when markets are falling. Over the long term this extra gearing should be positive for returns, assuming the fund manager is using it judiciously, but borrowing to invest does increase volatility, so risk-adjusted returns won’t be as flattering.
“When looking at average performance of long running funds and trusts across the board, it’s also important to recognise that investment trusts invest predominantly in shares, whereas there are more open-ended fund offerings that invest in bonds and cash, which will tend to have lower long term returns. So comparing the average fund with the average trust isn’t comparing like with like, as funds are more commonly used by investors looking for lower risk options, rather than full stock market exposure.
“Investors should bear in mind that past performance is not a guide to future returns. We would also caution against using your ISA allowance every year to invest in the same fund, as some diversification would be beneficial from a risk management perspective. Nonetheless, splitting your investment equally across these funds and trusts each year would also have produced an ISA value in excess of £1 million, while also providing some diversification. It is still a risk hungry approach though, seeing as every single one of these funds is invested purely in the stock market, and some follow fairly specialist strategies. However long term ISA investors can afford to take such risks if they won’t need to draw on their money for ten to twenty years, or more.
“It has also become significantly easier to become an ISA millionaire now the annual allowance is £20,000. For ten years following its introduction in 1999, the ISA allowance was just £7,000, and was only raised to £20,000 in 2017. Looking back at our data, if the annual ISA allowance had been £20,000 since 1999, 70% of funds and 86% or trusts would have performed well enough to be worth over £1 million today. Indeed the annual investment in Scottish Mortgage trust would have been worth £4.2 million. This underlines how generous the ISA allowance is today compared to when the accounts were first launched, and the opportunity now available to investors to build up a nest egg which isn’t subject to income or capital gains tax.”