UKC

We set up a stocks and shares ISA for the kids' future a couple of years back with a few grand we lucked into, since then we've top it up a bit each month but have otherwise generally neglected it. We took some advice at the time which felt like paying for the bleeding obvious but as you'll see, I'm out of my comfort zone when it can't be adjusted with a hammer or googled easily.

At present it's all in a fairly low fee medium risk capital accumulator fund that's delivered uninspiring single digit annual growth. We got interested again in our neglected nest egg when we noticed the 'interest' paid each month was pence not tens of pounds as expected. Anyway, I now think that is actually interest paid on the cash part of the product which varies as trades happen but is always kept small. The accompanying capital gain or loss doesn't seem to be clearly reported anywhere. Basically the dashboard and helpline aren't very helpful when it comes to understanding all this, or I'm a Muppet.

We won't need to start drawing it down for at least 10-15 years, maybe more depending what we use it for so can afford to take some risks at the moment for better gains.

To the meat of the question. Why do income focussed funds seem to massively outperform capital accumulator funds at comparable published risk levels? Is it a quirk of the post COVID inflationary period that will fade away or reverse in time? What's to stop me putting some or all of our money in high performing income funds then reinvesting the apparently much better cash return myself? Capital gains tax I guess but it's a small ish pot so if I stay below the relief threshold or do well enough it's worth paying the tax on the small difference what's wrong with that logic?

I'm not looking for specific financial advice, I'm just trying to understand why the two basic types of fund seem to have performed very differently in recent years?

Jk

Growth funds do well when interest rates are low. These companies rely heavily on borrowing to develop the next big thing.

Dividend funds do better when interest rates are high, they are generally large established companies providing essentials.

Best to balance the two to iron out fluctuations.

For the kids, where the money will not be needed for many years, consider increasing the risk/return of the portfolio to maximise gains.

Use your ISA allowance to.minimise CGT.

I am not an ifa, just an interested punter. These are ideas not advice. 

Accumulation funds won't show 'interest' paid, there is no interest except on cash. Accumulation funds reinvest dividends (from stocks) and interest (bonds) automatically with no charges. Your total return includes both growth due to share price and dividend/interest. Whether you are shown the split of total return from capital growth and income depends on the platform. Look for advanced/extra options on whatever screen it shows you performance. 

What is the 'medium risk' fund? Is it stocks only or stocks and bonds (e.g. 60-40 split)? What platform are you using and what's the fee?

Increasing interest rates depress bond prices so if you bought in to a fund including a % of bonds when interest rates were rock-bottom,  then increasing interest rates might be responsible for a lacklustre total return. Other culprits for poor returns include high platform & fund fees. 

There'll be no CGT on a ISA product, similar products should be available inside and outside the ISA wrapper depending on the platform you use. You can switch product and/or platform in pursuit of better returns (or better reporting) but you're almost certainly going to better off keeping it inside the ISA.

Questions: 

What benchmark is your fund being measured against? MSCI World? FTSE All World? 

What is the ongoing charge on the fund? 

What are you being charged by the platform/provider for having it managed? 

What time horizon are you comparing the income vs capital accumulation fund across?

What is your risk measure? Volatility of returns a la Sharpe Ratio? 

These are absolutely fundamental to making sure you and your kids are getting good value for money. If you don't know what the target the investment fund is aiming to hit is, you can't tell if they'll being successful or not. If you don't know what the total cost of holding the fund is you don't know whether they're doing a good job at that task *after fees*. Some sectors have a good run for a few years then suck, some have a good decade. If we know ahead of time which they were, we'd all get rich. But retail investors *do not know* (neither to investment advisors, consultants, bankers, hedge funds) and so we should be agnostic in our choices on this front. Once you've answered these questions you need to consider whether the product you are using is getting you value for money compared to the best in market products. 

My main piece of advice would be to buy and read ''How to Fund the Life you Want'' by Robin Powell and Jonathan Hollow simultaneously with ''Smarter Investing'' (4th edition) by Tim Hale. I know books are time consuming but if you don't know what you're doing in this area you can accidentally get mugged  by the financial services sector which loves to make stuff as opaque as humanly possible to justify charging you lots in fees needlessly. 

Disclosure: I work in this field but this is not personal financial advice and should not be taken as such. 

Something doesn’t sound quite right there. I have something similar with Vanguard which I’ve had for three years. It’s a 100% equity accumulation fund. Right on the front page it says there’s been a 21% return over the three years. It has paid zero interest because it never holds any cash. 

The platform is Aegon. I'll have to check some of the details/fees when I can log in on a PC in a couple of days but from memory they are comparable with or lower than most of the other available funds. The fund is one of Aegon's own accumulators which is mostly beating it's benchmark over several years, I don't think it's doing bad, just not as well as some of the higher risk products and way worse than many of the income funds. When we set it up the higher risk options weren't doing so well, probably pandemic related but now I've engaged with it I want to get it working better for us.

Mostly I've been comparing funds on their 5 year performance (the longest timeframe easily checked) but also checking whether that's been steady or a rollercoaster with one big win and years of modest performance.

Jk

What markets does it invest in. An accumulator means nothing.  Is it U.K., Europe , USA or Global. You need to figure that out first. 

Are accumulator and income the right terms here? Accumulator normally refers to whether the dividends reinvested or not.  Income normally refers to a style of investing. An income fund may have accumulator and distributing versions.

Most investment funds and exchange traded funds (ETFs) will come in two classes - an accumulation class (usually designated ACC) and a distributing class designated DIST. The accumulation class will take any interest, coupon payments from fixed income (corporate and government bonds) and dividends from equity holdings and reinvest them in the fund as a whole. The Dist class will simply pay that money out into your account where it sits until you do something with it. 

Holding Acc version of funds is generally a good plan if you don't want to to tinker with stuff. I know many older people in the UK hold income focused investment funds and trusts and like the idea that they will receive an income of maybe 3% of the face value of the fund while hoping the capital will grow in the background. It helps them stay the course by feeling like they never have to sell their actual fund units and can just take the income. I've got 30 years of working life ahead of me so everything I have is Acc to just roll the snowball down the hill, financially speaking. 

Your fund will have a KID (Key Information Document) and this should detail what the fund is doing, what is is composed of, what it aims to do, what its benchmark is and what its approach to risk is. Remember, there are always two ways of considering risk. You can consider risk as volatility of returns (whether your fund can bounce up and down in value over time). And you can consider risk in terms of failure to meet a reasonable goal. If you've got 15 years time horizon you should be utterly indifferent to ups and downs over a month, 6 months, even several years in a row. Global financial markets will do their thing and eventually get themselves back on track. Getting worried about risk 1 (volatility of returns) can distract people from risk 2, which is that excessive caution can stop you meeting realistic goals over a decade or more timescale. One of my relatives holds life savings in cash, seemingly indifferent to the fact that while she experiences no volatility in returns, the purchasing power of her cash is getting steadily annihilated by inflation. Depressing!

Ok, I don't want to get too bogged down with the specific fund I started with, I have read the available reports, KID etc. I'll dig out the fees when I can.

What I'm really struggling to understand is why when I list and sort alternative funds* by 5 year cumulative performance all the top performers are listed as primarily income funds rather than capital accumulators and they're miles ahead, not just a little, the best are gaining 60+%/5years whereas ours is more like 15% from memory. Is it a feature of how the gains are measured for different fund types? Or a transient quirk of the times? If so, which quirk?!

*Apparently not all available to retail customers without engaging an advisor.

Jk

Maybe not but it is how they seem to be differentiated. I'm distinguishing between funds that are primarily focussed on delivering an income vs funds that automatically reinvest all income and are focussed on capital gains.

Jk

,>e vs funds that automatically reinvest all income and are focussed on capital gains.

I'm no expert but I don't think it works that way. If you get income, it is income, not a capital gain, even if reinvested. I think "growth" funds are more likely to involve CG as the share value increases, possibly with no income.

Do you mean from a tax perspective? If so then I've misunderstood what I read. If not I'm more confused.

I know I'm not helping this by being all at sea with the terminology.

Jk

Yes

Ok, when I googled it looked like investment income was taxed as CG but in my case it's not a worry currently. It's possible I asked the wrong question or followed the wrong train links on HMRC website!

Jk

Maybe you are just in a poorly performing managed fund. Simple as that.

can you post exact details of the name of the fund and it’s reference. 

I think it's doing ok for what it is but I that isn't what I don't understand.

Edit: I'll get the details when I can but I can't from my phone

Jk

That would be useful as a starting point. May help instead of getting a bit loff track as regards all the  terminology etc.