Who wants to be an ISA millionaire?

Who wants to be a millionaire? For financial advisers, the answer is probably that most of their clients do. But whether or not that aspiration is realistic, new data from Interactive Investor makes interesting reading – a study by the platform into clients who’ve made it to the £1m mark with investments held in individual savings accounts (Isas) shows they have invariably made use of a secret weapon. Interactive Investor’s Isa millionaires are much more likely to have significant holdings of investment companies in their Isas.

The figures are stark. Savers with £1m or more in their Isas hold an average of 23 per cent of their assets in investment companies, while open-ended funds account for only 7 per cent (the remainder is mostly invested in direct holdings of equities). Meanwhile, savers yet to make it to millionaire status have an average of 23 per cent of their Isa holdings invested through open-ended funds, but only 12 per cent in investment companies.

What explains this contrast? Well, investment performance is certainly one key factor. Every independent study conducted in recent years suggests that investment companies have outperformed their open-ended fund counterparts over medium- to longer-term periods. For example, research published by Cass Business School last summer found investment companies won out by an average of 0.8 percentage points a year between 2000 and 2016.

Over time, that consistent outperformance adds up to substantial sums. It is likely that one reason Isa millionaires hold more investment companies is that these funds played an important part in getting them there.

However, there are other factors at play here. One is investor sophistication. It appears that wealthier investors with more experience of choosing funds have felt more comfortable picking investment companies. That makes sense: the marketing spend of the much larger open-ended fund universe has been dominant in recent times; investors who have plumped for investment companies instead are likely to be those with the confidence to make decisions for themselves, rather than going for the easiest option.

Wealthier clients are also more likely to have had access to good-quality financial advice. And here the statistics suggest financial advisers are increasingly likely to steer clients towards investment companies. Data released earlier this month shows advisers put £985m of client cash into the sector last year, the second year running that investment company purchases came in at close to £1bn. The figures have risen five-fold since 2012.

It’s important to be careful here, too. These statistics they could be taken to support the idea that investment companies are better suited to more experienced investors with larger sums at their disposal. That would be the wrong conclusion – certainly, this is the group that is currently investing more in the closed-ended sector, but the challenge should be to persuade more inexperienced investors to embrace these vehicles, not to maintain the status quo.

Indeed, there is no reason why investment companies should be the preserve of more sophisticated investors. While some advisers still feel that the structure of an investment company, as well as its ability to take on gearing, makes such funds less suitable for investors with only modest sums or limited experience. But these are red herrings: investment companies are no more risky than open-ended funds and just as suitable for beginners.

In practice, everyone has doubts about how best to invest their money for long-term success. In which case, taking comfort from the example set by the most successful investors makes a lot of sense. Their message is clear: investment companies should be a more significant element of many people’s Isa portfolios.