How parents can use investment trusts to help to pay for their children to go to university and avoid a (potential) lifetime of debt.
While high street branches shut their doors up and down the country, the Bank of Mum and Dad seemingly never closes. Figures from the Institute of Fiscal Studies show that some £17bn is gifted from parents to their adult children each year for numerous life milestones – including buying a house or getting married.
Another area where I expect it to be heavily tapped is paying for the cost of university. University tuition for most UK students is around £9,250 a year, totalling £27,750 over a standard three year course. And then there are the living costs. By taking out loans to cover all these expenses, a graduate can easily leave university £50,000 in debt aged just 21.
Research by the Association of Investment Companies (AIC) found more than half of current or prospective university students (54%) have considered not going to university because of the costs involved.
Understandably, parents are keen to lighten this load as much as possible. Over four-fifths (85%) have saved or invested for their children’s future, according to the AIC research.
Yet parents overwhelmingly favour cash savings for their children (63%), while only 16% use shares, 15% investment trusts, 11% bonds and 10% property (respondents could select more than one option).
Investment paving path to university
Parents are missing a trick – investment trusts in particular provide a long-term investing solution for a life event many years in the future. The longevity of the investment trust sector speaks for itself, with the first launched over 150 years ago.
Investment trusts pool investors’ money to create diversified portfolios. Claire Dwyer, head of investment companies at Fidelity International, explains: “This diversification helps spread risk, which can be especially beneficial for long-term investors looking to minimise potential losses.”
Investment trusts are listed on stock exchanges, which means they can be bought or sold on any trading day, “liquidity that provides flexibility for long-term investors, allowing them to access their investment should they need to”, Dwyer points out.
Crucially, many investment trusts generate income from their assets, such as dividends from stocks or interest from bonds. “For long-term investors, this income can be reinvested, compounding over time and potentially boosting overall returns,” says Dwyer.
Investment trusts also have the potential to deliver capital growth as the underlying assets appreciate in value over the long term. There are plenty to consider. The bottom line is, if your children are still young but you have one eye on their future university place, you’re likely to leave them much better off putting their savings into an investment trust than an inflation-lagging cash account like (almost) everyone else.
Here are four to think about:
Unloved UK – Fidelity Special Values
The UK has been largely unloved since the global financial crisis, but that has also been reflected in the price of UK companies, which look cheap versus their peers and their own history. One worth considering is Fidelity Special Values, which looks for stocks which are out of favour. Manager Alex Wright admits UK equities “have remained volatile so far this year”, due to a mix of weak economic data, higher inflation and sharply rising interest rates.
But he has been “pleased by the earnings resilience” of the companies he holds. Wright cherry picks businesses with lower levels of debt and the strength “to navigate the uncertainty” he is currently seeing in the UK. Financial companies form the biggest part of the trust’s portfolio, a sector which has enjoyed “particularly strong returns” of late, as banks benefit from the increased cost of borrowing.
Revitalised Japan has forgotten its mid and small-cap – Baillie Gifford Japan Trust
The Japanese market has been having a moment. Its recent strength has brought to an end a long period of disappointing returns as the country wrestled with deflation, a sclerotic corporate culture and a stagnant economy. However, this has not been reflected further down the market, where the mid and small-sized companies are still trading at incredibly attractive valuations.
The Baillie Gifford Japan trust has a track record dating back more than 40 years. Managed by Matthew Brett, the portfolio principally invests in 40-70 small and medium-sized companies, which are typically more volatile than the Japanese stock market as a whole, the team’s disciplined approach has provided shareholders with excellent long-term returns. The trust has suffered in recent times due to its exposure to the mid and small-cap segment, but does look attractive from a valuation perspective.
Sizing Europe – European Opportunities Trust
For Europe, I’d look to Devon Equity Management’s European Opportunities Trust. Its strategy is to invest in growth-orientated, defensive companies which perform well, with less dependence on the economic conditions. A sensible strategy when markets lack clarity.
The trust invests in a portfolio of ‘special’ companies listed across European stock exchanges that the fund manager Alexander Darwall and his team “believe are world leading businesses in their fields”. Darwall, who has an exceptional track record dating back more than two decades in European equities, generates his own ideas, primarily through company meetings. He looks for evidence of successful, proven business models being implemented by open and honest management teams. Firms benefiting from economic tailwinds and in strong positions within their industries are preferred.
Income beneficiaries – City of London Investment Trust
Things that have looked unattractive for many years are suddenly turning heads – a good example might be traditional UK equity income funds. Once the bedrock of many an investor’s portfolio, these funds have been disliked for the past decade as returns from a value-tilted FTSE 100 have paled in comparison to US tech behemoths such as Amazon and Apple.
A good option here is the City of London Investment Trust. One of the longest-running investment trusts in the UK – it aims to provide growth in income and capital by investing predominantly in larger UK companies with international exposure. It currently yields 5.1%.
Juliet Schooling Latter, research director, FundCalibre & Chelsea Financial Services
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
