Fund choice: Scottish Mortgage Investment Trust (SMT)
Share price: 1,203p (03/03/21)
Market cap: £17bn (03/03/21)
Starting to invest early is a huge advantage for several reasons. While it allows plenty of time to ride the ups and downs of markets and compound any gains, it also enables investors to back trends that could take several years to pay off.
Such is the appeal of Scottish Mortgage Investment Trust in a Jisa, or any portfolio that can stick with its bets for 15 to 20 years. Yes, the trust has already made substantial gains, especially in 2020, and this fund is no hidden gem. But the managers continue to focus on the big trends of coming decades, from electric transport to the increased digitalisation of everyday life.
While the fund may currently be best associated with its big bet on Tesla (US:TSLA) and a fondness for the likes of Amazon (US:AMZN), the investment team has spent recent years tilting to newer sources of growth. This includes a focus on digital businesses in China such as Meituan-Dianping (HK:3690), as well as a growing interest in high-growth unlisted stocks.
From its stake in genome sequencing name Illumina (US:ILMN) to a holding in Elon Musk’s spacecraft venture SpaceX, the fund is putting money behind many important (and potentially lucrative) advances for humanity.
Share choice: Alphabet (US:GOOGL)
Share price: $2011
Market cap: $1.36trn
In the coming months and years, Alphabet (US:GOOGL) is likely to face an increasingly bitter fight for the advertising revenue it derives from its unparalleled volume of data and content. Indeed, a refusal to comply with domestic content creation regulations meant Google Search was very nearly kicked out of Australia earlier this year. The company is also facing questions about the way it uses data in Europe and a Department of Justice enquiry in its home market. Google advertising contributed $46bn in the final quarter of 2020 alone, equivalent to 81 per cent of its parent company’s sales. Keeping hold of that as regulators circle is not going to be easy.
But should that matter to long-term investors?
It’s hard to find a company that is investing more in the future of the planet than Alphabet. Under the loosely-labelled umbrella ‘other bets’ the company has two private equity firms with stakes in some of the world’s most innovative businesses, a scientific research and development company, a driverless vehicle pioneer, a developer of smart home appliances and the mysteriously named ‘X’ which seems to invest in everything from smart glasses to cyber security. And that’s ignoring the cloud division, where revenues have risen from $5.8bn in 2018 to $13.1bn in 2020.
If investors can stomach some turbulence along the way, Alphabet looks like a great bet for the 2020s and beyond.
IC model asset allocation – investing for kids
It’s important to use your allowances. Take maximum advantage of the Junior Isa allowance (£9,000 in the 2020-21 tax year) to grow your investment pot tax-free.
What’s in it?
Equities – 60-75%
Your child can invest in a lot of equities as they are unlikely to be forced to sell out when markets fall and crystallise any losses. Using this allocation to buy interesting funds can help them learn about different regions, new technology and how companies work and drive the economy.
Fixed income – 0-15%
If you want to use a Junior Isa to teach your child about the variety of possible investments, fixed income should form part of the portfolio. Higher yield funds can also provide decent returns over the longer term and help protect the portfolio from severe downturns.
We have a maximum 15 per cent allocation to bonds, so your child has a large enough allocation to have a split of different types of bonds and learn how this important asset class works.
Other – 20%
We are assuming this category includes investment in higher risk assets including investment trusts with high private equity exposure. Private equity or venture capital is increasingly being used as an exciting way to invest in companies in the earlier stages of their development (many companies especially in the technology space are choosing to join the market later). But these assets are higher risk and can be harder to sell, which is why they are more appropriate for long term investment.
Cash – 5%
You could make the case that there is no need for cash in a child’s portfolio. It is far less important for them to be able to cushion risk than it is for an adult. We have 5 per cent in cash to reflect that the portfolio is an evolving thing and hopefully your child is learning as they go.