'My kids' savings are in poor funds – what do I do?'

It can be a big ask, managing investments for the entire household. There are potential Isas, pensions and workplace pensions for each adult, and 'in some cases, investment pots for the children as well.

That’s the case for Michael, who diligently set up child trust funds (CTFs) for two of his children and a Junior Isa (Jisa) for his youngest. However, these were held with a provider then known as Foreign and Colonial (F&C) and were limited to investing in a handful of its investment trusts. The company was known for its good performance back then, but Michael has paid the price for not paying attention, and the savings have been left to languish in poorly performing funds, now run by Columbia Threadneedle (see table below).

“I have just reviewed my pension, as I’m 10 years from retiring, and noticed all the kids’ funds are flat. So I am transferring the pots to Hargreaves Lansdown (HL.), will liquidate everything and start from scratch,” he says.

“I need investment ideas as I’ve realised my mistakes. I have a decent Isa and pension and make around 5 per cent a year, but I have been too UK-focused. I’ve spent years thinking Lloyds Banking Group (LLOY) would come back.

“I want to change this for the kids. They can take a bit of risk, get into new shares, artificial intelligence… stuff I don’t understand. They should have portfolios that are forward-thinking, modern and global, everything mine was not.” He says funds such as Morgan Stanley Global Brands (GB0032482498) and Scottish Mortgage Investment Trust (SMT) are what he has in mind.

It is slightly more complicated than just picking the same funds for all the children: Megan, 17, Daniel, 15 and Adam, 12. Megan will turn 18 next June and go to university in 12 months’ time. She will therefore have access to her savings and free choice to spend them. She currently has £56,000, but Michael will add another £9,000 in the next tax year.

“I want to sit down with her and a copy of Investors’ Chronicle and pick some funds for her future. She can use the money for anything she wants, a house deposit or even income while she’s at university. She’s working in a local pub, which she did of her own volition, so has an understanding of what money can buy,” Michael says.

For the two boys, Michael will also put £9,000 into their £50,000 and £48,000 accounts every tax year until they turn 18, and give them free rein, hoping to educate and get them interested in investing. “I’m trying to get them interested, but it is hard,” he says.

On top of the CTFs and Jisas, the children have all received £11,000 as an inheritance, which Michael is thinking of investing in Junior self invested personal pensions (Sipps). “They are tax-efficient and I don’t want them to be able to spend everything all in one go. It sounds tedious but it is sensible. I know they should be p***ing it up the wall, but they have the cash to do that as well,” he adds.

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

Ben Yearsley, investment director at Shore Financial Planning, says:

Choosing investments for your kids is hard work, with many opting for a safety-first approach – as you do with all things children-related! However, with investing, you really want to be doing the opposite. The biggest problem with Jisas is what to do as the child approaches their 18th birthday, as at that point they can withdraw the funds and spend as they wish. Whether they do is probably down to how much financial education their parents have given them.

Megan is planning on going to university next year and may well want to spend her savings; this means she should have a markedly different portfolio from her brothers. She could hold it in cash or UK gilts for a year to 18 months, as you can get a 5 per cent annual return – this would give her some breathing space and a chance to figure out what she wants to do.

However, I will also suggest a portfolio of broadly defensive multi-asset funds, which should help in times of volatility. I would blend Trojan Ethical (GB00BKTW4R13), which is a mix of stocks, inflation-linked bonds and gold, Ruffer Investment Company (RICA), CT Universal MAP Balanced (GB00BF99W060), a mix of global shares, UK shares and bonds, and Vanguard LifeStrategy 60% Equity (GB00B3TYHH97). This can be changed when Megan works out what she needs for university. For example, she may want an income and could easily generate £2,000 a year (3.5 per cent yield) and still grow her savings.

For Adam, who is 12, it is a simpler choice: mostly stocks, as there is time to take risks, although I would have some multi-asset funds at the core, combined with a global tracker and some specialist funds in which he might take an interest.

For the core, I’d again choose Trojan Ethical but bring in Vanguard LifeStrategy 100% Equity (GB00B41XG308), for its low-cost global stocks exposure. For the specialist funds, I’d add Schroder ISF Global Sustainable Food and Water (LU2380234166) and Polar Capital Global Technology (IE00B42W4J83), as it has exposure to AI. Both of these invest in companies that are integral to everyday lives today and should continue to be going forward. Also, apart from some of the bigger tech stocks, there should be little crossover between all the funds.

Finally to 15-year-old Daniel. This is probably the hardest of the lot as when investing in stocks you have to assume the money can be invested for three to five years as a minimum. But Daniel could cash the lot in in under three years, so you need to be mindful of that. His portfolio will therefore be an amalgamation of the other two. Trojan Ethical and Ruffer from Megan’s for stability, alongside Schroder ISF Global Sustainable Food and Water from Adam’s. I’ll add a new fund, First Sentier Responsible Listed Infrastructure (GB00BMXP3956), as it has growth and income characteristics as well as being defensive – investing in essential infrastructure we use every day. Split the funds evenly as there’s little point in getting overly complicated, and as you can see I’ve tried to add a sustainable element to each.

Sam Ratnage, senior wealth manager at Tideway Wealth, says:

As you say, there is a risk your children do not want to monitor their portfolios when they take control at 18. It’s important to prepare for this while making sure their savings remain invested and grow. Low-cost index funds can work well here, as it is not uncommon for those running active funds to fail to beat tracker funds, as you have seen with your initial picks.

Stocks offer the best opportunity to grow your children’s savings, so buying a diverse selection of exchange-traded funds (ETFs) means the kids can ‘buy and hold’, not take an active interest and not lose too much to charges. However, while stock markets offer long-term growth prospects, they are hard to predict in the short term. Contractions can be sudden and it can take several years to recover. Therefore, a tracker portfolio would be more appropriate for Adam, and less so for Megan.

Fidelity, Vanguard and iShares offer good value ETFs and index funds, and you’ll be paying less than 0.35 per cent per year in charges. Buying a global mix either by tracking the MSCI World index or a mixture of US, UK and European indices is sensible.

Bringing in some active funds will make it easier for ‘goal-based’ investing, such as if Megan wants an income at university. It also means the kids can bring in ethical or sustainable choices. I like Heriot Global (GB00B99M6Y59), which is a global growth fund that buys stocks for the long term, Unicorn UK Income (GB00B00Z1R87), which buys small-and-mid-cap UK stocks with high yields, and LF Montanaro Better World (GB00BJRCFP12), which is an ethical fund that invests in the green economy, healthcare and environmentally conscious stocks.

Right now, these could be paired with more safety and income-focused bond funds. Bonds should always be managed by a fund manager, as the market is not efficient or as liquid as the stock market, and index bond funds are likely to underperform active ones. The bond market has had a challenging 18 months, but it now offers better opportunities for income and capital protection. Here I would pick Artemis Corporate Bond (GB00BKPWGV34), which buys investment-grade secure debt issued by businesses, and Royal London Sterling Extra Yield Bond (IE00BJBQC361), which invests in higher-income bonds.

In terms of Junior Sipps, as you say, using them removes the issue of giving 18-year-olds even more money, and it puts less pressure on them to build up their own pensions. However, the age at which they can access this cash is a long time away so you should consider whether that’s worth the tax advantage.