Investor Views: "I Will Invest in the New Lifetime ISA"

Private investor Massimo Santoro explains the challenges many younger investors face when it comes to saving for the future

Emma Simon 26 October, 2016 | 12:33PM
Facebook Twitter LinkedIn

Like many younger investors, Massimo Santoro faces an uphill task when trying to save for his future. He is currently saving into both a pension and an ISA, and says he hopes to use the latter to build up sufficient savings for a deposit on his first home. However, as he has recently moved out of his parents’ home and into rented accommodation, there is less money each month to invest, making it harder to build a sizeable sum.

This has not stopped Santoro, who works as an operations consultant, investing but it has restricted what he can put aside each month at present. “I still invest in my pension. My employer contributes too so I want to make sure I keep this going,” he said.

However, it has meant that he can no longer make monthly payments into his ISA. Instead he is now topping this up on a more ad hoc basis.

He added: “It’s been an expensive few months so I’ve stopped my regular ISA contribution. But I have been putting money in when I can afford to, and I’ve tried to top up when markets have fallen. Hopefully I’ll be able to increase contributions again in future.”

Santoro has a small holding in a cash ISA which he hopes to transfer into a new Lifetime ISA when they are launched next year. “These certainly look like an attractive option for savers like me,” he said. “It should give me an extra boost to help me save for my first home, but I also have the option of keeping savings invested for retirement.”

Lifetime ISAs are due to be launched next April. Under the rules of this scheme savers can put up to £4,000 a year into this new ISA, and for every £4 they add, the Government will put in a further £1 – boosting their pot by up to £1,000 a year. The scheme has come under some criticism, with concerns younger investors would prioritise Lifetime ISAs over pension saving.

Santoro says he would look to save into a Lifetime ISA alongside his company pension though, rather than instead of it.

Emerging Markets for the Very First Fund

Deciding what to invest in initially wasn’t an easy task, Santoro says. “Initially I put all my ISA money into one fund: Aberdeen Emerging Markets.”

He invested in this Silver-Rated fund just over four years ago, but decided to switch after a sustained period of under-performance in emerging markets: “I always knew this sector would be volatile. But emerging markets seemed to hit a dip and it wasn’t clear that they were going to turn around any time soon.”

He now invests his ISA across four funds for greater diversification. He hopes this strategy will provide a more stable footing for the future. These are Woodford Equity Income, Fundsmith Equity, Threadneedle European Select and Evenlode Income.

Woodford Equity Income is managed by Neil Woodford, who set up his own fund management house two years ago, after successfully running income funds for Invesco Perpetual for 25 years.

Woodford has a Silver Rating from Morningstar. Peter Brunt, an analyst at Morningstar says: “Our confidence is growing in this fund. It is managed by one of the most talented fund managers in the sector and, after some initial teething problems, we are reassured to see a period of increased stability at Woodford Investment Management.”

Fundsmith Equity is a global fund, which has a five-star performance rating from Morningstar, and a Bronze Analyst Rating. Manager Terry Smith invests in companies that are already best in class rather than trying to find tomorrow’s emerging stars. He is looking for “compoundable earners” which in theory he can hold over the long term.

This leads to significant biases within the fund, but in performance terms it has been in a ‘sweet spot’ in recent years. Between November 2010, when the fund launched, and November 2015, the fund delivered an average of 16.7% a year. The MSCI World Index delivered 10.3% a year over the five years.

The Threadneedle European Select fund has a four-star performance rating, and Bronze-medal rating, reflecting Morningstar’s confidence its ability to outperform peers. 

Co-managers Dave Dudding and Mark Nichols target firms with “pricing power” and high barriers to entry. This has led to a concentrated portfolio of sturdy-growth companies.

Santoro manages his ISA through Chelsea Financial Services platform, which he says he is very easy to use, and offers a good range of funds.

Upping the Risk for Pension Savings

When it comes to his pension, Santoro says he is prepared to take a bit more risk with his money as these funds are invested for the longer term, selecting Schroder Recovery and Jupiter European.

This Schroder fund is another strong performer, managed by Kevin Murphy and Nick Kirrage, earning a Silver Analyst Rating. As the name suggests this fund targets out of favour and under-valued companies, that still have strong fundamentals.

Jupiter European, managed by Alexander Darwall, is another stand-out fund: it has a five-star performance rating and a coveted Gold Rating.

Abu-Habsa says: “For investors who understand its risks, this fund is a standout in its sector. It has many of the features we like to see: a talented long-standing manager who is part of a highly experienced team, a diligent investment process that has been proven through time, and a consistency of approach on which investors can rely.”

Darwall hunts for firms with above-average earnings growth prospects and superior pricing power.  But this approach has led to a concentrated portfolio of around 35 stocks which can take significant positions when it comes to country and sector selections.

Investors should therefore be mindful of the potential for sharp performance swings along the way. Morningstar said: “Although the fund has outperformed its index and peers over the manager's tenure by a wide margin, this has included extended periods of underperformance.”

Santoro has also dabbled in a few higher risk investments. These have included a handful of individual shareholdings and an investment in Marlborough Nano Cap, a fund investing in micro businesses. This wasn’t through his ISA as it wasn’t available on most of the main ISA platforms.

He says: “This didn’t perform quite as well as some comparable funds in this sector, but I have been reasonably pleased with it.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk