The £250 voucher arrived a couple of months ago and I've finally got around to using it to open a Child Trust Fund (CTF) for Abigail. The only problem is that there are millions of different fund providers and they are all slightly different.
It boils down to three choices:
1. A cash deposit account that pays interest - no risk
2. A shares and funds account - value may go up or down plus management charges
3. A stakeholder account (government regulated shares and funds) - value may go up or down, capped fees @ 1.5% (of capital)
Am I risk averse?
Decisions, Decisions
What to do?
The cash account seems too safe, there's no risk, but with interest rates around 4-5% there's little reward.
The shares and funds account are aimed towards experienced investors (not me) plus there are no caps on charges.
This leaves the stakeholder account. This is regulated by the government to eliminate a lot of the risk. First they set a maximum percentage that any provider may charge for management fees, this is 1.5%. They also start 'lifestyling' after 13 years. This means that they gradually transfer the money out of stocks and funds into cash deposits to reduce the exposure to market fluctuations. Very clever.
The only thing that puts me off the Stakeholder accounts is that the charges are deducted from capital yet there is a risk of losing. In a bad year, the fund could lose 25% of its value, but the management fee would be taken regardless. Perhaps I want the moon on a stick, but its would seem fair to me that they can have 1.5% of what they make.
Research
There follows some calculations based on the offerings from HSBC and The Share Centre.
The Share Centre's Invester Account offers discounted investments in four specially selected funds. But with 0.5% of capital in charges (4 times a year, effectively 2%). Their selection of funds is good, but you can invest in any fund or unit trust if you are prepared to pay dealing charges (there are no dealing charges on their selected funds).
Funds available to Share Centre Investment CTF:
1. Close UK Escalator 100 Fund
2. Legal & General UK Index Trust (the only fund Share Centre Stakeholders can invest in)
3. Artemis UK Growth Fund
4. Jupiter Global Managed Fund
HSBC only do a Stakeholder account and the only fund HSBC Stakeholders can invest in is:
5. HSBC UK Growth and Income Fund
Doing some digging into the past performance of these funds is quite bleak for the 5 year picture:
The Stakeholder Accounts only allows you to invest in one fund only which means you are more exposed to risk. Their charges are 1.5% of capital per year. Plus 'lifestyling' kicks in after 13 years.
Conclusion
For minimum gains and zero risk, take the Cash Deposit.
The Stakeholder account is riskier than the Investor account. Why? Because although it has capped charges, the fund providers only allow you to invest in a single fund that they choose. This means that all your eggs are in one basket and you are more exposed to fluctuations. To minimise the risk, the fund is 'lifestyled', this also minimises your possible gains.
The Investor accounts offer a wider selection of funds (some discounted) but charge a higher management fee. This means that you can spread the money across several funds which minimises your exposure, particularly if the funds selected hedge each other. To minimise risk, start 'lifestyling' the fund yourself.
For the increased cost of the Investment Account, you are buying the opportunity to minimise your risks by spreading your money across diverse funds.
Oh yeah, I almost forgot... past performance is no guarantee of future performance. The value of stocks and shares can go up as well as down which means you could get back less than you invested.
In other words... You pay your money and you take your chances.
I think I will hold my decision for a while pending your advice. If you have any it is always welcome, please post a comment
It boils down to three choices:
1. A cash deposit account that pays interest - no risk
2. A shares and funds account - value may go up or down plus management charges
3. A stakeholder account (government regulated shares and funds) - value may go up or down, capped fees @ 1.5% (of capital)
Am I risk averse?
Decisions, Decisions
What to do?
The cash account seems too safe, there's no risk, but with interest rates around 4-5% there's little reward.
The shares and funds account are aimed towards experienced investors (not me) plus there are no caps on charges.
This leaves the stakeholder account. This is regulated by the government to eliminate a lot of the risk. First they set a maximum percentage that any provider may charge for management fees, this is 1.5%. They also start 'lifestyling' after 13 years. This means that they gradually transfer the money out of stocks and funds into cash deposits to reduce the exposure to market fluctuations. Very clever.
The only thing that puts me off the Stakeholder accounts is that the charges are deducted from capital yet there is a risk of losing. In a bad year, the fund could lose 25% of its value, but the management fee would be taken regardless. Perhaps I want the moon on a stick, but its would seem fair to me that they can have 1.5% of what they make.
Research
There follows some calculations based on the offerings from HSBC and The Share Centre.
The Share Centre's Invester Account offers discounted investments in four specially selected funds. But with 0.5% of capital in charges (4 times a year, effectively 2%). Their selection of funds is good, but you can invest in any fund or unit trust if you are prepared to pay dealing charges (there are no dealing charges on their selected funds).
Funds available to Share Centre Investment CTF:
1. Close UK Escalator 100 Fund
2. Legal & General UK Index Trust (the only fund Share Centre Stakeholders can invest in)
3. Artemis UK Growth Fund
4. Jupiter Global Managed Fund
HSBC only do a Stakeholder account and the only fund HSBC Stakeholders can invest in is:
5. HSBC UK Growth and Income Fund
Doing some digging into the past performance of these funds is quite bleak for the 5 year picture:
| Past returns (%) | (1) | (2) | (3) | (4) | (5) |
| One week | ? | 1.30% | 1.10% | 2.00% | 1.1% |
| Six months | ? | 8.90% | 3.10% | 11.30% | 9.4% |
| One year | ? | 23.30% | 19.60% | 34.50% | 24.5% |
| Three years annualized | ? | 12.60% | 18.90% | 19.40% | 12.7% |
| Five years annualized | ? | -1.20% | 2.10% | -2.90% | 1.1% |
The Stakeholder Accounts only allows you to invest in one fund only which means you are more exposed to risk. Their charges are 1.5% of capital per year. Plus 'lifestyling' kicks in after 13 years.
| Account Type | Best Case (conservative) |
Worst Case | Annual Fee for £10K |
Risk | 18 years of £500/year (my dodgy logic) |
| Cash Deposit | 6% | 4% | £0 | none | £14,779 |
| Stakeholder | 15% | bust | £150 | single fund | £20,000 |
| Stocks/Shared/Funds | 15% | bust | £200 | spread across funds | £28,000 |
Conclusion
For minimum gains and zero risk, take the Cash Deposit.
The Stakeholder account is riskier than the Investor account. Why? Because although it has capped charges, the fund providers only allow you to invest in a single fund that they choose. This means that all your eggs are in one basket and you are more exposed to fluctuations. To minimise the risk, the fund is 'lifestyled', this also minimises your possible gains.
The Investor accounts offer a wider selection of funds (some discounted) but charge a higher management fee. This means that you can spread the money across several funds which minimises your exposure, particularly if the funds selected hedge each other. To minimise risk, start 'lifestyling' the fund yourself.
For the increased cost of the Investment Account, you are buying the opportunity to minimise your risks by spreading your money across diverse funds.
Oh yeah, I almost forgot... past performance is no guarantee of future performance. The value of stocks and shares can go up as well as down which means you could get back less than you invested.
In other words... You pay your money and you take your chances.
I think I will hold my decision for a while pending your advice. If you have any it is always welcome, please post a comment
8 comments,
Blog, Thursday, September 1, 2005 20:46
