Investors who have accumulated £1 million or more in individual savings accounts (ISAs) have a higher proportion of investment trusts in their portfolios than the average investor, research indicates.
If you want to be an ISA millionaire then it looks like investment trusts are the way to go, as closed-ended funds have helped power investors to seven-figure savings over the past 20 years.
A study by stockbroking platform Interactive Investor into those with £1 million ISA portfolios shows investment trusts make up a bigger proportion of investments than open-ended funds.
Of those with £1 million or more stashed in their ISAs, 59% of the portfolio is invested in direct equities, 23% is in investment trusts, and 7% is in open-ended funds, or unit trusts. The remainder is 7% in cash, 3% in exchange traded funds (ETFs), and 1% in bonds.
This is in stark contrast to the average ISA customer on the platform who has 23% in open-ended funds and 12% in investment trusts.
The average £1 million portfolio has 34 holdings and the owner of the portfolio trades on average 46 time a year, five times more than the typical customer.
The most popular investment trust in ISA millionaire portfolios is £1.2 billion Scottish Mortgage (SMT), which is known for its long-term and lucrative stakes in technology disruptors such as Amazon (AMZN.O) and in private, unlisted $1 billion plus tech companies, or ‘unicorns’.
While Scottish Mortgage is a growth portfolio, the second most popular investment trust is decidedly different. Primary Health Properties (PHP) is a real estate investment trust focused on modern doctors’ surgeries on which it earns government-backed rent. It pays a quarterly dividend and yields 4.4%.
In third place, is another income-generating trust: £2.9 billion HICL Infrastructure (HICL) that runs contracts to run public sector facilities in schools, hospitals, prisons, military housing, and toll roads in the UK and abroad.
The most popular open-ended fund is top performing Fundsmith Equity, run by Citywire AA-rated Terry Smith. This fund consistently tops the sales charts and has recently become the largest fund in the UK after gaining the crown from M&G Optimal Income, which has transferred the bulk of its assets to Luxembourg.
First State Stewart Asia Pacific Leaders, Janus Henderson European Select Opportunities, Baillie Gifford Global Discovery, and Investec UK Smaller Companies make up the rest of the top five unit trusts in millionaires’ portfolios.
Rebecca O’Keeffe, head of investments at Interactive Investor, said the preference for investment trusts providing successful returns is backed by data from the Association of Investment Companies (AIC) that showed ‘on average investment trusts have outperformed their unit trust counterparts by over 2.5% per annum over the last 20 years’.
‘Most people are trying to eke out an extra 1% here or there on their investments, so an extra 2.5% per annum is an enormous additional return over time, although there’s never any guarantees and past performance is just that – in the past,’ she said.
How to become an ISA millionaire
To become an ISA millionaire, you would have had to put away the maximum each year allowed in the two decades since individual savings accounts replaced their predecessor personal equity plans (Peps) and to have chosen good investments.
An investor who did this would have saved £206,000 which would have required an annual rate of return of just over 15.5% to generate a seven-figure portfolio, or ‘some element of luck’, said O’Keeffe.
Investors who also put the maximum away Peps would have had another 12 years of savings and been able to invest a maximum of £270,000.
‘Investing the maximum since 1987 would take your required rate of return down to 8.5% - still difficult, but perhaps not impossible and likely to explain why two-thirds of our ISA millionaires are aged over 65,’ said O’Keeffe.
Top holdings in £1 million portfolios:
|Investment Trusts||Open-ended Funds||Direct Equities|
|1||Scottish Mortgage (SMT)||Fundsmith Equity||Royal Dutch Shell (RDSA)|
|2||Primary Health Properties (PHP)||First State Stewart Asia Pacific Leaders||GlaxoSmithKline (GSK)|
|3||HICL Infrastructure (HICL)||Janus Henderson European Select Opps||Lloyds (LLOY)|
|4||Worldwide Healthcare (WWH)||Baillie Gifford Global Discovery||Aviva (AV)|
|5||Templeton Emerging Markets (TEM)||Investec UK Smaller Companies||Legal & General (LGEN)|