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May 4, 2007 12:15 pm

Think long-term for their future benefit

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Most parents who stash funds away for their children’s later years through the government’s child trust fund (CTF) scheme do so with considerable caution.

According to Scottish Friendly Assurance, a CTF provider, about one third of parents stash the money in cash. Many others simply opt for the default option, normally an index-tracker fund, but often with high annual charges of 1.5 per cent.

But attitudes are changing with growing numbers of investors happy to take on much greater risk, an approach many advisers support given the 18-year investment time horizon of CTFs.

“Interest in cash is beginning to diminish in the market,” says Neil Lovatt, sales director at Scottish Friendly. “People are noticing it is not necessarily a suitable choice unless you’re extremely averse to risk. The market is showing there is room for choice.”

The primary motivation for putting money into riskier asset classes is that child trust funds are long-term investments. And private equity and emerging markets funds offer the potential for significantly higher returns over an 18-year period.

At the moment, there are three ways to invest the £250 allowance for CTFs which the government awards every child born since August 2002.

The most straightforward is to put money into a cash savings account. Another option is stakeholder funds, typically a fund which tracks either the FTSE 100 or the wider FTSE All Share index. But you can also go for self-select CTFs managed by stockbrokers which mean your child’s money can be invested in a broad range of funds, stocks and shares, investment trusts or even funds of hedge funds. When it comes to self-select CTFs, the rule is: if an asset is listed on the London Stock Exchange, it’s eligible for inclusion within a CTF.

At the age of seven, children receive another £250 voucher from the government. In addition, up to £1,200 can be invested annually by family or friends before the child reaches 18. As an additional perk, the government recently confirmed that CTF money can be rolled into Isas at the age of 18, effectively giving eligible children a tax-efficient investment portfolio for life.

Exchange-traded funds (ETF) – open-ended funds which can be traded – are attracting growing CTF money. In the past two years, advisers at brokers Redmayne Bentley have seen increasing numbers of its CTF investors move money into ETF funds such as Barclays Xinhua 25 or FTSE Xinhua 25, two ETFS which each invest in a collective of 25 Chinese companies.

Redmayne Bentley charges 0.5 per cent commission for dealing as well as an annual plan charge of £20. Selftrade, the UK broker, charges a flat £12.50 per trade with no annual plan charges.

At Selftrade, two funds which have become more popular with CTF investors are SVG Capital, a private equity fund, and Standard Life’s European Equity fund, according to Neil Jameson, marketing director.

But if you choose not to go down the self-select route, some CTF providers still offer a wide choice of either in-house or external funds.

One group which has had some success in wooing parents to put money into private equity is Foreign & Colonial, which more than doubled the number of trusts within its CTF it offers from six to 13 a year ago and now supplies two funds which invest in unquoted companies.

“No doubt, we are seeing more interest in some of the niche funds,” says Jason Hollands, a spokesman for F&C. “People are becoming more interested in private equity as the number of stories in the papers about it increases and awareness of the industry grows.”

The Children’s Mutual, a group which specialises in children’s savings, offers a product array from four companies: Gartmore, Insight, Invesco Perpetual and UBS. David White, the group’s chief executive, reports that Invesco Perpetual’s Smaller Companies and Income funds are proving quite popular choices for parents receiving outside counsel.

But on the whole, most of Children’s Mutual’s CTF investors shy away from risk.

“They aren’t prepared to go as far as they would if they were risking their own money,” says White, whose view is based on what he calls the group’s “legions” of research.

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