Learning Lessons From ISA Millionaires

We’ve been hearing a lot about ISA millionaires in recent months. In some ways, I’d rather not too much of a fuss was made about them. Drawing attention to this phenomenon might attract some unwelcome attention. There could be a cry that “something must be done!”

However, when you look at the numbers, provided you started early enough and were able to put in your full allowance each year, ending up with a million-pound ISA didn’t require you to be a super investor.

PEPs and ISAs

Let’s roll the clock back a bit first and look at the history of tax-free accounts in the UK.

Personal Equity Plans (PEPs) were introduced in 1987, with an initial annual maximum subscription of £2,400.

By the early 1990s, you could put in £6,000 into a General PEP and £3,000 into a Single Company PEP. That total of £9,000 is worth £20,000 in today’s money — which is the same as the current ISA allowance.

Individual Savings Accounts (ISAs) replaced PEPs in 1999, although you were able to roll your PEPs into ISAs and continue to grow that money tax-free.

The annual subscription limit was dropped to £7,000 when ISAs were introduced and it stayed at roughly that level for the next decade. It then jumped to £10,200 in 2010, £15,000 by 2014, and £20,000 by 2017.

Had you invested the maximum possible amount in these tax-free plans since 1987 I reckon you could have put away a grand total of £294,760.

For number geeks, that breaks down into £206,560 in ISAs, £64,200 in General PEPs and £24,000 in Single Company PEPs.

Few people would have been fortunate enough to be in that position of course. That said, according to HMRC statistics, 4.1m people should earn over £50,000 this year and around 1m should earn more than £100,000.

Turning £295k into £1m

According to my calculations, had you invested the maximum from 1987, the average annual rate of return you would have needed to join the ISA millionaire club is 7.6%.

I don’t have the precise numbers but I reckon both global markets and the UK have returned in the region of 8-9% over the same timeframe.

In other words, a simple index tracker would have done the job.

There weren’t that many tracker funds around in the Eighties, but HSBC launched one in 1988 and I think a few were available before that.

The earlier you invest, the better

Of course, as with pretty much everything in investing, the earlier you start the better.

I didn’t get the ISA bug until the late 1990s, so I missed out on a lot of those earlier years and all that compounding. I’m still a fair way short of the magic million.

In fact, if you had only invested the full amount in ISAs since 1999 and had grown your money at the same 7.6% average annual rate, I reckon you would now have £420,000.

Therefore, in this example, the first 12 years of PEP contributions produced around 60% of the £1m and the last 20 years of ISAs the remaining 40%.

That’s compounding for you.

In order to have made a million just from ISA contributions then the required annual rate of return jumps to 15.5%.

Hats off to anyone who has achieved that, considering that 1999 marked a long-term high-point for the UK market that we’re only marginally ahead of today.

How many ISA millionaires are there?

I’ve seen estimates ranging from 250 to 1,000 for the number of ISA millionaires. Therefore, they are still rare enough to be a novelty.

Lord Lee is reckoned to be the first to achieve this milestone. In fact, he did it all the way back in 2003, having turned £126,000 of contributions into £1m.

According to the FT, Hargreaves Lansdown, the UK’s biggest investing platform, reckons it had 113 ISA millionaires at the end of February 2019. However, it only had three in 2012.

I expect we’ll see the numbers grow rapidly over the next few years, assuming a fair wind from the markets.

By 2025, if you had been able to put in £20,000 each year and markets had grown by 8% per annum, then those with a little over £0.5m today should have seen their ISAs grow to £1m.

Perhaps we might have thousands and perhaps even tens of thousands of ISA millionaires by the middle of the next decade?

Can you do it with investment trusts?

I’d wager that most of those with a million in their ISA probably did so by primarily investing in individual shares. Research by Interactive Investor seems to back this up. It looked at about 90 of its customers with million-pound ISA pots to see what they currently own.

59% by value was in individual shares and 23% was in investment trusts. Open-ended funds and cash were tied at 7% while exchange-traded funds (ETFs) accounted for just 3%. Bonds were last with a measly 1%.

Obviously what these folks hold now may not be same as what they owned over the last few decades. A case what got you there might not keep you there.

But the pecking order looks about right to me. Individual shares can produce the highest returns (and the heaviest losses) while investment trusts generally seem to do better than open-ended funds.

The best-performing investment trusts

More research, this time by the AIC, shows what have been the best-performing investment trusts since ISAs began. I reproduced the top half of this table in a recent article if you think it looks familiar.

Unlike most of these studies, where you just get to see the return from an initial lump sum, this shows what you would have got had you put your full ISA allowance into a single investment trust each April since 1999.

I like this approach as it mimics the way many of us invest (that is on a regular basis each year rather than in a single investment trust).

Fund	Sector	Amount
Aberdeen New Thai	Country specialist: Asia Pacific	£1,070,583
Aberdeen Standard Asia Focus	Asia Pacific — Excluding Japan	£966,042
Scottish Oriental Smaller Companies	Asia Pacific — Excluding Japan	£956,981
Rights & Issues	UK Smaller Companies	£950,500
Scottish Mortgage	Global	£932,615
BlackRock Smaller Companies	UK Smaller Companies	£903,804
Baillie Gifford Shin Nippon	Japanese Smaller Companies	£888,326
HgCapital Trust	Private Equity	£873,222
Worldwide Healthcare	Biotech & Healthcare	£860,491
TR Property	Property Securities	£845,173
Allianz Technology	Tech, Media & Telecoms	£824,180
International Biotechnology	Biotech & Healthcare	£818,560
Acorn Income	UK Equity & Bond Income	£816,000
BlackRock Throgmorton	UK Smaller Companies	£813,784
Biotech Growth	Biotech & Healthcare	£810,224
Polar Capital Technology	Tech, Media & Telecoms	£786,946
Invesco Perpetual UK Smaller	UK Smaller Companies	£784,344
Standard Life UK Smaller	UK Smaller Companies	£750,014
BMO Global Smaller Companies	Global Smaller Companies	£707,440

Think small to grow big

In terms of annualised returns, the sole millionaire trust, Aberdeen New Thai, works out at 16%. BMO Smaller Companies, the last on the list, is 12.5%.

Eight of those listed are small-company trusts. So I’d say the small-cap effect certainly seems to have some truth to it. Or perhaps I am just highly susceptible to confirmation bias!

Six are UK-focused small-cap trusts, which is pretty remarkable considering there are only about a dozen that have been around for the last two decades (of course, some may have been wound up along the way or been taken over, as was the case recently with Dunedin Smaller Companies).

Japan has been a low-return market for the last two decades so Baillie Gifford Shin Nippon has done a truly excellent job invesing Japanese smaller companies.

Asia Pacific takes the top three slots, helped by China’s high levels of economic growth so far this century.

I remember back in the late 1990s that Asian-Pacific trusts were being marketed pretty hard. I held a couple for a while but lost patience with them after a few years. As it turns out, that particular hype was well-founded.

The sector themes that have done best are biotech & healthcare (three entries) and technology (two).

The inclusion of TR Property was a standout for me, though. It has a great reputation but I didn’t realise it had done that well since 1999. It probably shares the prize with Baillie Gifford Shin Nippon for the best outperformance of its chosen market.

Specialise but position size

On a personal basis, it’s nice to see three of my current holdings on this list. However, two of them have been added to my portfolio relatively recently. Rather more annoyingly, I used to hold two other funds on this list (Polar Capital Technology and Worldwide Healthcare).

That said, my investing strategy these days is more about keeping what I’ve got. I tried to shoot the lights once, way back in the day. And I missed.

Measured bets are more my thing now. I still reckon investing a relatively small chunk of my portfolio in a few selected themes makes sense. It provides a little excitement and hopefully stops me from doing anything too rash elsewhere.

One big consideration with specialist funds is that they tend to cost more. And if you choose the wrong sector or region, you’re likely to massively underperform the wider market.

You also tend to see much variations between the best and worst performers than you would do with, say, a bog-standard global or UK fund. Specialist funds tend to dominate performance tables… at both ends!

   

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Disclaimer

Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.

Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!

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