There are currently 113 investors with £1m or more held in an Isa with investment firm Hargreaves Lansdown – 37 times more than the mere three there were in 2012. Britain is now estimated to have some 1,000 of these “Isa millionaires”.
Investors don’t need to be highflying financiers to join this elite but growing club. They just have to be calm, disciplined and patient. So how do these millionaires filltheir Isas? Data from Interactive Investor, a fund shop, shows that high-wealth individuals tend to opt for investment trusts over funds.
These trusts operate like funds, in that they have a pool of investments, but unlike funds they are a company in their own right that can be traded and therefore have a share price.
Of the company’s 88 Isa millionaires, a typical portfolio has just 7pc invested in funds with more than three times as much (23pc) held in trusts. By comparison, an average person’s Isa has 23pc held in funds and just 12pc in trusts.
According to data from the Association of Investment Companies, UK trusts have outperformed funds by an average of 2.5pc over the past 20 years. For someone with a sizeable portfolio, this 2.5pc makes a huge difference.
A person with £20,000 already in their Isa investing £5,000 now and at the start of every subsequent year would reach £1m by 2063, assuming they achieved returns of 5.7pc (the average annualised return of the FTSE 100 over the past decade). However, with an extra 2.5 percentage points of returns taking you to 8.2pc, you would reach Isa millionaire status by 2054 – nine years faster.
More than trusts and funds, Interactive Investor found that its millionaires mostly invested directly in shares. On average, 59pc of these portfolios is invested in individual companies, compared with just 47pc for ordinary investors. Of Hargreaves’s 113 Isa millionaires, just three have no direct share holdings.
Also common among seven-figure portfolios is low cash levels. Just 7pc of Interactive Investor’s typical £1m Isa is held in cash, compared with 13pc of the average investor’s account.
So who are these mysterious millionaires? Interactive Investor said two thirds of its Isa millionaires are over 65. Of course, this group has had time on its side. Someone putting the maximum amount into their Isa every year since the scheme was introduced 20 years ago would have saved more than £200,000.
To turn this into £1m they would have needed an annual rate of return of 15.5pc – a tall order. Yet those who also made the most of Personal Equity Plans, the forerunner to Isas, could have accumulated a pot of £270,000 since 1987, requiring more reasonable returns of 8.5pc.
This shows the importance of starting to build up your million-pound portfolio as soon as possible. To achieve your first million demands time and dedication. The average Isa millionaire with Interactive Investor makes 46 trades a year and has 34 different investments – five times more than in the average customer’s portfolio.
The firm’s Rebecca O’Keeffe said that, although this may seem like a lot, investors with large portfolios held mostly in shares need to have a wide range of stocks to ensure they have exposure to different sectors. She said: “Our most successful customers enjoy investing and looking after their portfolio, so will buy and sell when they see an opportunity.”
The shares most commonly held directly by Interactive Investor’s Isa millionaires were Royal Dutch Shell, GlaxoSmithKline, Lloyds, Aviva and Legal & General. These five also ranked among the top holdings at Hargreaves Lansdown, with BP, HSBC and the National Grid.
The favourite investment trusts among Interactive Investor’s millionaires were Scottish Mortgage, Primary Health Properties, HICL Infrastructure, Worldwide Healthcare Trust and Templeton Emerging Markets. Hargreaves users’ top investment trust was Scottish Mortgage.
Taking risks also paid off for the Isa millionaires. Three of the 10 most popular funds amongHargreaves' million-pound portfoliosinvest in smaller companies or emerging markets. These are Marlborough UK Micro-Cap Growth, Merian UK Smaller Companies and Stewart Investors Asia Pacific Leaders.
Moira O’Neill, of Interactive Investor, said: “What unites Isa millionaires is not background or career but discipline, process and a good savings habit. The most important thing is to make sure you are comfortable with risk level: take too little and you may not achieve your goals, but too much can wreck your portfolio. So a realistic strategy is important.”
Related Topics
- ISAs,
- Shares,
- Funds,
- Investment trusts,
- FTSE 100
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