How should my daughter invest her Lisa?

Sowmi is 18 and in her final year at school, and will start university in September. She has recently received funds worth £26,873 from a Child Trust Fund to which her father had been contributing since 2005. She is now going to open a lifetime individual savings account (Lisa) and contribute the full £4,000 a year allowance to it, with the aim of buying a home in 12 to 15 years. 

“Sowmi hopes to buy a first home with her own money and support from me," says her Dad. “She also has NS&I Premium Bonds worth £2,900, the value of which could grow by up to £500 a year due to family gifts.

“I have also invested £240 a month into a junior self-invested personal pension (Sipp) for her since 2015 – £300 a month with tax relief. I hope to continue making this level of monthly contribution as a gift to her until she completes her graduate degree. I expect to continue working for another nine years until I am age 68, and although I have a mortgage of £154,000 I hope to pay it off just before I retire.

“I have mostly invested Sowmi’s Sipp in funds, and think that she should hold 15 to 20 funds in both this account and her Lisa. I am going to suggest that she takes a low-risk growth approach in her Lisa, aiming for 3 per cent to 5 per cent a year, while she is still in education and until she can spend more time on it.”

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THIS INVESTOR'S CIRCUMSTANCES.

Chris Dillow, Investors Chronicle's economist, says:

You want a low risk and growth portfolio. But there is a trade-off – growth is largely unpredictable so stocks people think will offer it are sensitive to fluctuations in investors’ sentiment or what economist John Keynes called “animal spirits”. So they are risky. A low-risk portfolio must diversify the danger that investors will lose their appetite for risk, causing big falls in growth stocks.

You are doing this by holding some bonds, gold and metals. These are good diversifiers of many types of short-term risk but this insurance is expensive. Expected real returns by bonds are still sharply negative: yields of longer-dated index-linked gilts are around -2 per cent. And the gold price is very negatively correlated with interest rates, so it would fall if rates rise as the market expects. This means that you would lose money on these assets if economies grow and interest rates rise as markets are pricing in.

There is, however, a case for longer-term investors to hold these as well. It’s possible that in the next few years there will not be the 'old normal' economic growth but a continuation of the 'new normal' stagnation and instability. If so, bonds and gold might do better than expected and equities worse than expected. Many investors think that this risk is small, although I suspect it is unquantifiable, so we should be on guard against the small risk of a nasty event. It’s wise to have some non-equity assets even in a long-term portfolio, although parts of it will make losses – it wouldn’t be diversified if it didn’t.

There are two things that, as a long-term investor, you should be aware of.

One is fund managers’ fees – these compound nastily over time. An extra half percentage point of charges doesn’t sound much, but over 10 years it could easily amount to £750 for every £10,000 you invest. And you might not get much for your money. The more actively managed funds you hold, the more you dilute the chance of them outperforming in aggregate – that’s diversification. So be very wary of active funds. Look for investment trusts with similar strategies (if you can hold them more cheaply on the investment platform you use), especially ones on higher than usual discounts to net asset value. And consider global tracker funds – think of these as funds of equity funds which give you cheap and easy diversification.

Also, remember that being a long-term investor has an advantage. If you can afford to tie up your money for a long time, you can take on the risks of investing in illiquid assets that other investors are avoiding. This might be a case for considering property funds – although for me these carry too many cyclical risks. It is also a case for private equity funds, because a good portion of future growth will probably come from companies that are not yet listed. But private equity funds carry lots of manager risk. The returns of these vary from fund to fund more than the returns of funds which invest in listed shares, so you might need more than one.

Adrian Lowcock, independent investment analyst, says:

You have made a good start on investing to help make your daughter financially secure. Achieving this often requires flexibility as there may be times when your daughter would benefit from more immediate access to savings and investments.

Both Sipps and Lisas are intended for longer-term investment and you can only access them in extreme circumstances or with a penalty. So it is important that you remain flexible and willing to adjust, which may mean contributing to a regular individual savings account (Isa) instead of her Sipp.

Reconsider the objectives of low risk and growth for the Sipp. Although you expect to hand over its management to your daughter in the near term it's important to focus on the purpose of the investments and timescales. The money invested in the Sipp is likely to be there for over 40 years so it is better placed to take on more risk as it has time on its side. Discuss this with your daughter when deciding on a strategy.

The Sipp is at the higher end of the risk spectrum and I think that it has too many holdings. At its current size, I suggest concentrating it into a number of core holdings which can be increased as the portfolio grows in size to a maximum of about 20.

To reduce the risk of the portfolio, remove the direct share holdings. These are riskier and more volatile than funds and, given the size of the portfolio, are unlikely to make a significant impact on its overall performance. Exposure to niche sectors or countries also adds risk so I would remove L&G Battery Value-Chain UCITS ETF (BATT), Worldwide Healthcare Trust (WWH) and Vietnam Enterprise Investments (VEIL).

To get a portfolio that achieves your goals it is important to have a plan, asset allocation model and a core portfolio from which to build. It is better to start from a focused base than try to capture all opportunities as this can leave the portfolio overstretched and result in it being higher risk.

The Sipp has a lot duplication, for example, it has six global funds which can mean that it is not as well diversified as it might initially seem. Many of the funds you hold have a growth style which is not surprising because this style has performed strongly in recent years.

I would keep Fundsmith Equity (GB00B41YBW71) as a core global fund as well as ASI Global Smaller Companies (GB00BBX46522). You could add some style diversification via exposure to other funds. LF Lindsell Train UK Equity (GB00BJFLM156) accounts for about 20 per cent of the Sipp so I wouldn’t add more to this. As you are contributing £300 a month to the Sipp, invest it in other holdings to slowly bring the proportion of the Sipp that this fund accounts for to about 10 per cent.  

Below is a possible asset allocation for your daughter's Sipp.