What ISA Funds Are Millennials and Baby Boomers Buying?

There are similarities in the funds bought by both millennials and baby boomers. While the younger generation take more risk, those nearing retirement are also equity-focused

David Brenchley 26 March, 2019 | 2:45PM
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Despite supposed clear differences in investment time horizons and objectives, millennials and baby boomers have mostly been buying the funds for their ISAs during the 2018/19 tax year, data from The Share Centre for Morningstar.co.uk show.

The three most-bought funds by both generations were the same, with Terry Smith’s Morningstar Gold-rated Fundsmith Equity top of both tables. Nick Train’s Silver-rated Lindsell Train Global Equity and Jeremy Gleeson’s AXA Framlington Global Technology came in second and third.

A further similarity is that of Hideo Shiozumi’s Legg Mason IF Japan Equity fund, which was fifth in both lists. Meanwhile, two different share classes of Fundsmith Equity and Lindsell Train Global Equity popped up in the baby boomers’ chart.

It’s notable, says Sheridan Admans, investment manager at The Share Centre, that the top three in each list is focused on delivering long-term, capital growth through investing in high-quality companies throughout the world.

Admans likes Smith’s offering, too, noting it is a suitable choice for investors with a medium level of risk that are willing to take a long-term view. He notes that, with five-year annualised returns of around 18%, the strategy of looking for strong, stable businesses with distinct competitive advantages trading at attractive valuations has been proven over the years.

“It is no surprise that investors from both age brackets are turning to this fund as uncertainty remains and choppy markets are likely to continue,” he adds.

The Lindsell Train fund, which is also run by Michael Lindsell and James Bullock, has a similar philosophy; as does the AXA mandate, which invests in businesses focused on technology research, design and development.

The Legg Mason fund, meanwhile, is another strong performer. Annualised returns over a 10-year period are over 20%, showing that it’s possible to outperform in a market that has proved difficult for investors in the last decade.

Despite those difficulties, which have also cropped up in the past year or so, “it is clear investors still have faith within the region and its fundamentals based on the underlying data”, Admans adds.

Millennials Take Higher-Risk Bets

Delving deeper into the lists and looking at the differences between the two generations, millennials’ appetite for risk becomes increasingly apparent, continues Admans.

This shines through in their choices of the “more volatile” Bronze-rated pair Vanguard Emerging Markets Stock Index and the Jupiter India. “Both have struggled since the start of 2019, however the longer-term potential is likely to be the main attraction for millennials,” says Admans.

“Both regions are continuing to adopt technology and curb corruption to help create stronger economic foundations for their large populations. The outlook for these regions remains bright, although volatility is likely to remain in the near term.”

It is notable that there are two passive funds in the list of funds chosen by millennials, versus zero for baby boomers. As well as Vanguard’s emerging markets mandate, its Silver-rated Global Small-Cap Index fund is also in the list.

Elsewhere, Janus Henderson Global Technology, Newton Global Income and Marlborough Special Situations round out the list. The latter is further proof of millennials’ higher risk tolerance as it invests in UK smaller companies that are going through difficult periods currently.

Baby Boomers Go Global

While many advisers suggest a de-risking of portfolios as consumers near retirement, it seems baby boomer ISA investors are still keen on risk assets, equities in particular. Indeed, all of their 10 most-bought funds were focused on equities.

The older generation retained a global outlook within this, combining their aforementioned choices with the likes of James Thomson’s Silver-rated Rathbone Global Opportunities fund. The slightly racier Bronze-rated Standard Life Investments Global Smaller Companies fund also made an appearance, suggesting some are still hoping to see some capital appreciation, too.

There was a slightly more pronounced bias to income-generating options, particularly from their UK holdings. The Bronze-rated Artemis Income focuses on large-cap UK stocks like BP (BP.), GlaxoSmithKline (GSK) and Shell (RDSB) and yields a healthy 4.4%.

Schroder Income Maximiser, meanwhile, takes a different approach in order to pay a yield of over 7%. The fund, managed by Nick Kirrage and Kevin Murphy, has the same long-only equity portfolio as its more vanilla, sister fund Schroder Income.

However, in order to supplement that with additional income, it then sells call options over those same stocks it owns. These options give the purchaser the right, but not the obligation, to buy a stock from the fund at a pre-determined price on a specific future date.

In return for this, the fund receives a premium, whether or not the option is exercised, that it can then distribute to unitholders as additional income. The fact that the fund is long the stocks it is writing options on reduces risk, while the call options limits its upside potential.

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.

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David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk

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