Funds and trusts that have made ISA millionaires – AJ Bell

by | Mar 1, 2023

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Laith Khalaf, financial analyst AJ Bell

Written by Laith Khalaf, head of investment analysis at AJ Bell.

“There are basically three magic ingredients to becoming an ISA millionaire. The first is to fund your ISA with as much as you can, up to the full ISA limit each year if possible. The second is to take some risk by investing in the stock market, because if you opt for safer assets producing lower long term returns, it will take you much longer to hit the million pound mark. The third is to start as early as possible, so you get more contributions going into your ISA and enjoy more growth on your investments too. ISA millionaires have generally had to save hard, take risk, and get a bit lucky to build up such a big pot of money.

“Luck may more generously be interpreted as successful fund selection. Saving a full ISA allowance every year since 1999 would have netted you £684,891 if invested in the average global stock market fund; a handsome sum no doubt, but still considerably shy of the £1 million mark. Maximum ISA contributions over this period add up to £283,440, so it’s clear that to get to seven figures, investment returns have to do a lot of heavy lifting. Only 50 funds or trusts would have got you to the magic £1 million mark, out of almost 500 with a performance record dating back to 1999. That’s assuming you were loyal and kept investing in these funds each year and held on to them to the present day.

 
 

“Time will help compound returns from the market, but you’ve got to be in it to win it if you want to be an ISA millionaire. All of the 50 ISA millionaire funds and trusts are exclusively invested in the stock market, with many focusing on more volatile areas like private equity, smaller companies and emerging markets, so you need to be comfortable with risk to have made it to the million pound finish line. The good news is the ISA allowance is now significantly higher than it used to be, so there is scope for more people to become millionaires even if they take a bit less risk with their portfolio. The higher allowance may also mean we gradually see the age profile of ISA millionaires falling, because at the moment it’s largely the preserve of the more seasoned members of the investing community. The average age of ISA millionaires on the AJ Bell investing platform is 74, though the youngest is flying the flag for millennials at the tender age of 35.

“While it’s always interesting to consider the investing habits of ISA millionaires, we shouldn’t get too fixated on the £1 million mark. ISA savings can of course be extremely valuable at more modest levels. For instance, if you’re able to build up a £200,000 ISA pot, that could provide you with a tax-free income of £8,000 a year in retirement without even drawing down on your capital (assuming a 4% yield). When added to your private pension and the state pension, that could be a welcome boost to your retirement income that could ensure you don’t spend your golden years counting the pennies. It could also help you ride out any unexpected financial shocks, like the current spike in energy prices. For savers with more immediate financial goals, a Lifetime ISA pot of £30,000 will go a long way to securing a first home.”

Millionaire funds and trusts in detail

 

“Of the 472 funds and trusts with a performance record stretching back to 1999, when ISAs were launched, just 50 would have made you a millionaire from investing your full ISA allowance each year. The majority of these are investment trusts, which account for 35 of the 50, the remainder being open-ended funds. 

“There are probably a number of reasons why trusts have trumped open-ended funds in this endeavour. Trusts as a whole tend to be more equity focused than funds, including in more niche areas like private equity. They can also use gearing, borrowing money to invest, which over a 24 year period can provide a substantial tailwind to returns. The closed end nature of investment trusts also means they can trade at a discount or premium to the value of their underlying assets. This amplifies volatility, but can also lead to higher returns if the change in discount or premium is favourable between purchase and sale.

“All of the funds and trusts which make it into ISA millionaire 50 are actively managed. This is probably only partly down to outperformance by successful active managers over this period. Passive funds were not as widespread in 1999 as they are today, and so there are relatively few trackers boasting a long enough track record to make it into contention. Tracker funds also don’t generally serve the smaller companies sectors which have proved successful in creating ISA millionaires. There is however one tracker fund which is knocking on the door of the ISA millionaire fund list. An annual ISA investment in HSBC American Index fund since 1999 would now be worth £991,986. Close, but no cigar yet.”

 

ISA risk and reward dynamics

“The table below shows the value of a full ISA allowance being invested into selected fund sectors each year since 1999. This neatly demonstrates the variation in return investors can expect from an ISA savings plan depending on how much risk they are prepared to take. In particular the more bonds you include in your portfolio, the lower your portfolio volatility should be, but the lower growth you can expect over the long term too. (The IA Mixed sectors hold a certain amount in stocks, with the remainder in bonds, cash and other assets e.g. the IA Mixed 20-60% Shares sector has a maximum of 60% invested in stocks, with the remainder in bonds, cash and other assets).

“The IA India sector is the only one which has breached the £1 million ISA mark so far, based on full ISA contributions since 1999. An investment in the average global equity fund would have built up an ISA pot of £684,891, helped by exposure to the US stock market. The average UK fund is trailing some way behind on £539,840, but this still represents an almost doubling of money invested in the ISA. The UK gilts sector, by contrast, has not made a huge amount of headway over and above £283,440, which is the maximum total ISA contribution between 1999 and 2023 (based on ISA allowances at the start of each tax year – occasionally they have changed mid-year).”

 
IA sector average2023 ISA value
IA India/Indian Subcontinent£1,121,998
IA Global£684,891
IA UK Smaller Companies£684,550
IA UK All Companies£539,840
IA Mixed Investment 40-85% Shares£501,583
IA Mixed Investment 20-60% Shares£420,840
IA Mixed Investment 0-35% Shares£383,987
IA UK Gilts£314,912

Source: AJ Bell, Morningstar, Total Return to 20th February 2023

Top 10 funds and trusts that would have made you an ISA millionaire

“The tables below show the top 10 funds and top 10 trusts that would have made you an ISA millionaire by investing your full ISA allowance on the first day of each tax year since 1999. The 2023 ISA value is based on prices as at 20th February 2023. The final column compares the value on 20th February 2023 with the value on 5th April 2022, and includes a further £20,000 ISA contribution, as well as investment returns over that period.

 

“The best performing funds and trusts over this period are invested in riskier, sometimes specialist areas of the market, like technology and private equity. Smaller companies funds also feature heavily, reflecting the robust returns enjoyed by this segment of the market. It’s notable that many of these funds and trusts have fallen in value in the last year, some of them quite considerably. The fact they have still banked enough good performance to produce ISA millionaires shows your final investment ranking is a reflection of returns from start to finish, not just in the final furlong.”

TrustSector2023 ISA valueValue 2023 versus 2022
HgCapital Trust OrdPrivate Equity£1,864,097-12.95%
3i OrdPrivate Equity£1,580,46825.15%
Pacific Horizon OrdAsia Pacific£1,536,908-10.24%
Scottish Mortgage OrdGlobal£1,519,568-27.47%
Allianz Technology Trust OrdTechnology & Media£1,476,636-14.94%
abrdn Asia Focus plcAsia Pacific Smaller Companies£1,457,4240.39%
Scottish Oriental Smaller Cos OrdAsia Pacific Smaller Companies£1,389,35915.10%
Polar Capital Technology OrdTechnology & Media£1,363,386-12.16%
BlackRock World Mining Trust OrdCommodities & Natural Resources£1,306,9101.82%
BlackRock Throgmorton Trust OrdUK Smaller Companies£1,213,157-14.10%
FundSector2023 ISA valueValue 2023 versus 2022
Janus Henderson Glb Tech Leaders Tech and Tech Innovation£1,213,033-7.07%
CT American Smaller CompaniesNorth American Smaller Companies£1,208,6716.61%
Janus Henderson European Smaller CosEuropean Smaller Companies£1,176,6538.00%
Baillie Gifford Pacific Asia Pacific Excluding Japan£1,172,940-7.01%
abrdn Indian EquityIndia/Indian Subcontinent£1,165,278-6.95%
Baillie Gifford AmericanNorth America£1,128,495-23.99%
AXA Framlington American GrowthNorth America£1,124,372-4.19%
Liontrust UK Smaller CompaniesUK Smaller Companies£1,121,107-9.77%
CT European Smaller CompaniesEuropean Smaller Companies£1,105,161-0.26%
Schroder US Smaller CompaniesNorth American Smaller Companies£1,104,5309.66%

Sources: AJ Bell, Morningstar, Total Return to 20th February 2023

Tomorrow’s ISA millionaires

 

“Now the annual allowance has been increased to £20,000, the £1 million ISA pot is that little bit more attainable, though it’s still not easy by any means. Based on putting your full £20,000 into an ISA each year and achieving a 6% annual return after charges, you’ll hit the million mark after 24 years, so you still do need to be long term in your planning. If you were lucky enough to get an 8% annual return, you’d be hitting the million mark 3 years earlier, after 21 years.

“Of course, few people are in the position where they can set aside £20,000 a year, but even if you were only able to do half that amount, the joy of compound returns means you don’t have to wait double the time to become a millionaire. Sticking aside £10,000 a year and getting 6% annual return will get you to the million mark in 33 years. And if you fall short, you’ll still have a sizeable ISA pot to console you.”

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