The tale of two Junior ISAs and the bonkers strategy

Nov 6, 2019 | Tony Byrne's View

My fiancée Cholpon sold her car, a BMW 520 Diesel M Sport, for £6,800 a few weeks ago. She was wondering what to do with the proceeds when I suggested investing the money into two Junior ISAs for her young children to fund their future University education.

Of course children such as Marcos, aged 10, and Erica, aged 7, are not taxpayers anyway so why bother with ISAs? Well the answer is quite simple really. If a parent invests money for a minor the income from it is taxed on the parent at their marginal tax rate if the income is above £100. However, Junior ISAs are an exception to this rule as they are Income Tax free.

Furthermore ISAs are Capital Gains Tax free which means that if the capital gain is higher than the CGT annual exemption, currently £12,000 per person per annum, in a tax year, Capital Gains Tax on the gain in excess of the exemption would otherwise be payable. Interestingly minors have their own CGT exemptions and are liable to CGT on gains in excess of £12,000 per tax year even if the capital was gifted to them by a parent. Bizarrely the UK tax system is full of anomalies like this.

I recently became aware of a momentum investment strategy which is called, would you believe it, the bonkers strategy! This is because it involves investing all of your money into one fund for 6 months before selecting another single fund for the following 6 months. Basically you invest in the fund with the best performance, or momentum, over the previous 6 months, then 6 months later you choose the fund which has performed the best over the previous 6 months and so on. Usually the best performing fund every 6 months is a different fund.

Believe it or not but this this strategy has achieved a return of 5,622% over the 22 years to 31 August 2017! That’s an average return of 11% every 6 months. Now that’s what I call impressive.

It must be emphasised that this is a high risk investment strategy and that it could result in a large decrease in the value of your investment were you to experience, say, 3 consecutive 6 months periods of price declines. This is certainly a strategy with above average volatility. Nonetheless for small sums and for investors with a long time horizon, such as minors, it is worthy of consideration.

Cholpon has decided to save £100 a month into each Junior ISA and will probably increase the monthly subscription over the next 10 years. I used a calculator website to work out how much the 2 Junior ISAs could grow over the next 10 years assuming a compound annual growth rate of 22% and £100 p.m. subscription into each one and the result was c.£65,000 each! Not bad eh?

I figure that £65,000 each in 10 years’ time will just about cover the amount of student debt they would otherwise each accumulate after 3 years at University so, fingers crossed, if the bonkers strategy performs as well over the next 10 years as it has done in the past then Erica’s and Marcos’s University education will be paid for with an investment of just £6,800! If this comes off we will of course be delighted.

Obviously this is not a recommendation to our clients because it is such a high risk strategy though some of you may wish to have a little dabble. I’ll leave that for you to decide. Clearly this is an educated guess at best for Cholpon’s children, but it is a fun one. The company that created the strategy and continues to run it is called Fund Expert. We may adopt their strategy in the future and offer it as a small proportion of clients’ investments for the more adventurous investors.

In the meantime we have a number of other interesting investment propositions for clients with high growth potential so if you have spare money to invest why not get in touch with us? You know it makes sense.

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