DIY investment platform Interactive Investor has revealed its average Isa millionaire account is powered by a larger weighting towards investment trusts than funds.
These bigger accounts have 46 per cent in closed-ended funds on average, with only 7 per cent of their portfolios in their open-ended counterparts.
II has found its average Isa millionaire account is powered by a larger weighting to trusts
Investment trusts are known for being long-term, ‘buy-and-hold’ vehicles, and they have historically outperformed their open-ended counterparts on average – though investors should remember past performance is not an indicator of future performance.
According to II, the average UK All Companies investment trust has outperformed its fund equivalent by 1.8 per cent per year over the last decade while the average Global investment trust has beaten its fund equivalent by nearly 1.5 per cent per year.
Rebecca O’Keeffe, head of investment at Interactive Investor, said the significant proportion of holdings in investment trusts is a ‘standout point’.
‘Investment trusts are often overlooked in favour of open-ended funds,’ she added.
‘While Interactive Investor have long appreciated the benefits of all types of investment, trusts have traditionally not appeared on other high profile rated lists, a serious oversight that needs rectifying, which may in part explain why they are less popular in general.
‘However, for those in the know, they are a highly attractive option. They won’t always outperform funds, and in a falling market they will tend to lag behind, but over the long-term they have a track record of adding significant value.’
‘Outperformance of one or two percentage points a year might not sound like a lot, but the compound effect of this annual additional return as the years roll by can make a huge difference.’
|Asset type||Average Isa millionaire portfolio||Average Isa account|
|Exchange Traded Product (ETP)||3%||4.50%|
|Source: Interactive Investor|
Of course today’s Isa millionaires have the luxury of being able to use their full Isa allowance each year (which currently stands as £20,000) but with an average of 72, most would have started off investing via Personal Equity Plans (PEPs).
‘So, if there is one thing that we can learn from Isa millionaires – whatever our budget – it is the benefit of patience and the fact that time is an investor’s best friend,’ O’Keeffe said.
Investment trusts have narrowed significantly over the past ten years and have been in somewhat of a bull market since the financial crash, so the sector’s ten year figures, understandably, look particularly attractive.
The most popular holdings of the average Isa millionaire at II
Lindsell Train Global Equity
BNY Mellon Asian Income fund
Vanguard US Index
Lindsell Train UK Equity
City of London
Royal Dutch Shell
Lloyds Banking Group
However, O’Keeffe argues that their outperformance also extends to 15 and 20 years.
She added: ‘The structure of trusts and their ability to use gearing also contribute to a way of generating additional returns.
‘However, it is also true to say that there are times when investment trusts underperform. Volatile markets tend to see the sector fall disproportionately, so as always with investing, it is buyer beware.’
How do you become an Isa millionaire?
So how has the average II Isa millionaire made their million?
According to II, they have made an average of 24 trades a year, with an average trade size of £23,602.
They also have an average of 28 lines of stock.
By comparison, the average Isa customer on the II platform trades 9 times over the same time period, with an average of 8 lines of stock.
The length of time it has taken to become an Isa millionaire varies as that is determined by the amount invested and the investment return.
The platform found that if you were to start investing now with the full £20,000 Isa allowance, and your investment saw 5 per cent annual growth excluding fees, it would take 25 years to reach the £1million mark – £1,002,269.08 to be exact.
Meanwhile if your investments grew by 7 per cent net of fees, you could trim three years off that period, achieving £1,048,722.82 in 22 years.
But if your investment experienced annual growth of just 3 per cent, it would take 31 years to reach a seven-figure sum.
O’Keeffe added: ‘Most of us won’t get to be an Isa millionaire, but there is no harm in aspiring to good things. The key is to get started as early as possible and try to invest the maximum amount you can afford.
‘You also need to try and find the right balance of investments where you take enough risk over the long term but are still able to sleep at night.
‘Not everyone will want investment trusts to take up almost half of their portfolio. And only experienced investors are likely to want direct equities to take up a large slice of their portfolio too – so it’s important to find the right approach for your personal circumstances.
‘This could be looking at the overall balance of your portfolio or drip-feeding money into your Isa on a monthly basis. There are a range of places to get ideas and find starter investments, including rated or quick start lists.’
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