Investing in stocks and shares isn’t for everybody. But history shows it can provide a superior long-term return than leaving money in cash, albeit with more volatility along the way.
Time is short for those who want to use this year’s stocks and shares Isa allowance, as the deadline is midnight on Friday, April 5. That’s just over one week away.
The Isa allowance is issued on “use it or lose it” basis, so anybody who misses the deadline has lost this year’s for good.
However, they get a new £20,000 one next day, so it’s not the end of the world. The big question is where to invest.
Most people take out as stocks and shares Isa through a big investment platform such as AJ Bell, Bestinvest, Fidelity, Hargreaves Lansdown or Interactive Investor.
These offer thousands of UK and international company stocks, plus a huge range of investment funds that spread your risk by putting money into dozens of different companies.
Funds cover every market and sector in the world, such as the FTSE 100, S&P500, and European, Japanese and emerging markets.
Financial experts say it is important to get a balanced mix of funds, rather than putting all your eggs in one basket.
But one sector has done particularly well since Isas were launched way back in 1999, which is 25 years now.
Its identity will surprise many because it’s from the UK, and our stock market has struggled lately.
Darius McDermott, managing director as investment platform Fund Calibre.com, has analysed the best performing investment funds since 1999, and found that UK smaller companies were the most successful of all.
While small, growing companies are more volatile in the short term, they can be more rewarding over time.
In 1999, the stocks and shares Isa allowance was set at £7,000. As a benchmark, someone who invested their full allowance in the MSCI World Index would have seen their money grow 468 percent.
This would have turned their £7,000 into £39,760, McDermott said. “That is in spite of the dot.com bubble, global financial crash and pandemic.”
However, investors could have done a lot better by investing in the most successful investment fund of all since 1999, Artemis UK Smaller Companies.
Its remit is to identify between 60 and 90 growing businesses that it believes will produce strong investment returns over the longer term.
The fund’s managers Mark Niznik and William Tamworth meet between 300 and 500 companies a year, and try to pick the likely winners.
They have a strong track record of doing just that.
Since 1999, Artemis UK Smaller Companies has grown an astonishing 1,826 percent, McDermott calculates. “A lucky investor who had invested £7,000 in 1999 would have a staggering £134,809 today,” he said.
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The investor would have a lot less if they had played safe with a cash Isa, he added. “With an average rate of three percent, their £7,000 would be worth just £14,656.”
McDermott picks out another fund that also did well.
Liontrust UK Smaller Companies has grown 1,271 percent since 1999, turning £7,000 into a meaty £95,976.
Smaller company stocks are more volatile, typically outperforming the stock market in good times, when investors are happy to take more risks, but falling faster in a downturn when they play it safer.
With the FTSE 100 climbing as economic confidence returns, now could be a good time to invest in the UK smaller companies sector.
This does not mean Isa investors should rush out and buy these two funds today. Past performance is no guarantee of future returns.
Yet they’re well worth considering as part of a mix of funds. When it comes to investing, small can sometimes be beautiful.
