The best and worst child trust funds

By Philip Scott
Updated: 06:34 EDT, 31 August 2007

 

Child trust funds, the Government scheme to give children a financial headstart in life, pass their first major milestone this weekend.

Every child born since 1 September 2002 - five years ago on Saturday - has been eligible for a payment of at least £250 to put into an approved account where it should grow over 18 years.

The scheme actually came into effect on 6 April 2005 - long enough to compare the performance of rival providers. And it is the High Street giants that are posting some of the worst returns.

While equity-based CTF offerings from High Street banks are languishing at the bottom of the performance charts, more esoteric, higher risk investments are coming out on top, driven by the buoyant stockmarkets experienced since CTFs were introduced.

Lloyds TSB's Balanced Portfolio, which invests in a mixture of equities, bonds and cash is among the worst performers, since launch on 2 April 2005 to 24 August this year, it has achieved a return of just 15.03% compared to its peer average of 29.62%.

The Royal Bank of Scotland Stakeholder, another balanced fund, is up just 19% while Abbey's Multi-Manager Balanced International Tracker fund has achieved just 23.72%. Though not actively managed, its global bias has hurt returns to date, whereas a conventional UK tracker has delivered a more robust return.

HSBC's CTF, UK Growth & Income has done slightly better, posting growth of 27.16% but it has still lagged the average All-Share stakeholder fund, which is up 34.92%.

The best equity CTF since their launch has been the Ishares FTSE/Xinhua China 25 from Redmayne Bentley, a stockbroker – it has grown by a massive 144.76%.

Other strong performers include the F&C Pacific Assets and the F&C Private Equity, which invests in businesses not listed on the stock market, achieving 103.76% and 80.79% respectively. Montanaro European Smaller Companies, another F&C fund, has returned 72.37%.

The Children's Mutual, a CTF provider has a mixed bag of funds. Strong performers include its UK Smaller Companies Equity CTF, which has posted growth of 59.16% since launch while its Income CTF has delivered 55.67%. Both are managed by Invesco Perpetual.

In contrast, Gartmore US Growth and Gartmore Cautious Managed, again both offered through The Children's Mutual, have delivered 24.26% and 20.25% respectively. The UBS CTF, which is also available through the friendly society, UBS, has achieved just 24.06% since April 2005.

Justin Modray of Bestinvest, an independent financial adviser, says: 'Parents should not be seduced into taking more risk than is appropriate. Recent weeks have been a timely reminder that what goes up can also fall quite rapidly, investing in areas such as China and in smaller companies requires a steady nerve.'

Redmayne Bentley may hold claim to supplying the best performing fund to date but it has also delivered the poorest - at the bottom of the pile is the group's ishares GBP Corporate Bond, which has posted just 6.85%.

Your child is eligible for a CTF if he or she was born after 1 September 2002, and entitled to child benefit. The Government provides you with a voucher worth £250 (£500 for low-income families) shortly after the birth plus another £250 (£500) at the age of seven. Parents, relatives or friends can top up a child's CTF account up to a maximum of £1,200 every year. Children cannot access their account until their 18th birthday.

Martin Bamford of Informed Choice, an adviser, says: 'Parents have to remember that CTFs are a very long-term investment and while some niche markets have performed spectacularly over recent years, we cannot take it for granted that this will continue over the coming 18 years. But we believe the stock market is the place to be – and then closer to age 18, parents need to cut back on the equity exposure and move in to safer areas such as cash and bonds.'

There are three types of CTF. There are CTFs that invest in stocks and shares where the returns are tax-free and then there are stakeholder CTFs, which also invest in the stockmarket but the charges are capped at 1.5% per annum. The manager of the fund must also gradually switch from shares to safer investments such as cash when your child reaches 13. The third option is a cash CTF, which works like an ordinary savings account, but the interest is tax free.

Justin Modray says: 'For many parents, a good stakeholder CTF is the most sensible route. Returns are likely to be less erratic and the investment will be phased away from stock markets and into safer areas between the ages of 13 to 18, reducing the likelihood of plunging stock markets hitting the fund as your child approaches age 18.'

Modray recommends the F&C Stakeholder, as it is the lowest cost FTSE All Share tracker with a 1.2% annual charge. He also likes the Family Investments Stakeholder, managed by fund group New Star. It invests across global stockmarkets and bonds.

If you want to opt for cash route, Britannia Building Society pays 7.5%. However this includes a 1.25% bonus for the first 24 months, so parents might need to shop around for a better deal when the bonus expires.

Yorkshire Building Society pays 7.3% including a bonus of 0.7% for the first 12 months but the best non-bonus account rate is the 7.25% paid by Shepshed Building Society.

If you do not open a CTF account, the government will take your voucher and invest it in a fund of its own choosing. A list of CTF providers can be found at www.childtrustfund.gov.uk.

HOW THE CHILD TRUST FUNDS COMPARE Provider Fund % growth Redmayne Bentley iShares FTSE/Xinhua China 144.76 F&C Pacific Assets Trust 103.76 F&C F&C Private Equity Trust 80.79 F&C Montanaro European Smaller 72.37 F&C Foreign & Colonial Eurotrust 64.02 The Childrens Mutual Invesco Perpetual UK Smaller Companies Equity 59.16 Redmayne Bentley iShares FTSE 250 59.08 F&C F&C Global Smaller Companies 57.88 The Childrens Mutual Invesco Perpetual Income 55.67 F&C Graphite Enterprise Trust 53.60 F&C Foreign & Colonial Investment Trust 53.39 Redmayne Bentley iShares FTSEurofirst 80 48.49 The Childrens Mutual Invesco Perpetual World Growth Portfolio 44.85 F&C F&C UK Select Trust 44.79 Scottish Friendly Scottish Friendly Managed Growth 40.32 Liverpool Victoria Liverpool Victoria Growth 40.19 The Childrens Mutual Gartmore European Growth 36.54 The Childrens Mutual Insight Investment European Ethical 35.36 Family Investments Family Charities Ethical Trust 35.33 Typical FTSE All Share Stakeholder FTSE All Share Index less 1.5% annual charge 34.92 Redmayne Bentley iShares FTSE 100 34.83 F&C British Assets Trust 34.67 The Childrens Mutual Insight Investment Evergreen 34.54 F&C F&C Capital & Income Investment Trust 31.68 The Childrens Mutual UBS UK Select 31.15 Typical FTSE 100 Stakeholder FTSE 100 Index less 1.5% annual charge 29.85 HSBC HSBC UK Growth & Income 27.16 The Childrens Mutual SG Balanced Managed 26.02 Family Investments Family Investments Child Trust 24.55 The Childrens Mutual Gartmore US Growth 24.26 The Childrens Mutual UBS Managed 24.06 Redmayne Bentley iShares MSCI Japan 23.84 Abbey Abbey National Multi-Manager Balanced Int Tracking 23.72 F&C F&C US Smaller Companies 22.34 Redmayne Bentley iShares S&P 500 20.28 The Childrens Mutual Gartmore Cautious Managed 20.25 Royal Bank of Scotland Royal Bank of Scotland Stakeholder Investment 19.00 Lloyds TSB Scottish Widows Balanced Portfolio 15.03 F&C Active Capital Trust 10.28 Redmayne Bentley iShares GBP Corporate Bond 6.85 All figures from 6 April 2005 to 24 August 2007 Source: www.bestinvest.co.uk