The number of ISA millionaires has risen by almost 70% in the last year, according to Hargreaves Lansdown. Nearly 1,000 of their clients have hit the magic million, compared to just under 600 in 2020.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, comments that they “hold the lesser-known secret to making a fortune from ISA investments: getting rich slowly.” She advises that “ISA investors don’t take enormous risks. More of them hold collective investments than single shares.”
Let’s take a closer look at the investing secrets of ISA millionaires, including the most-selected shares and funds in their portfolios.
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The investing habits of ISA millionaires
According to Sarah Coles, ISA millionaires “consistently invest as much as possible of their annual allowance, as early as possible in the tax year, in a diverse and balanced portfolio. And they’ve done this every year for decades.”
How long would it take to hit your million, assuming you’d made maximum contributions since the PEP was first introduced in 1987? According to research by IG, the average annual return of the FTSE 100 is 7.8%, which would have turned your ISA into a million by 2021.
Given the benefit of long-term investing, it’s not surprising that 72 is the average age of Hargreaves Lansdown’s ISA millionaires. However, some of the platform’s ISA millionaires are still in their 20s and 30s. And Lord Lee of Trafford, the UK’s first ISA millionaire, hit the million-pound mark in only 16 years.
So, which investments have helped to boost the ISA millionaires’ returns?
Top 10 shares held by ISA millionaires
Hargreaves Lansdown reports that these are the top 10 shares held by their ISA millionaires:
Company (and ticker)
5-year total return
AstraZeneca plc (AZN)
98%
Aviva plc (AV.)
-18%
BP plc (BP.)
-15%
GlaxoSmithKline (GSK)
-3%
Legal & General Group (LGEN)
9%
Lloyds Banking Group (LLOY)
-28%
National Grid (NG.)
11%
Rio Tinto (RIO)
79%
Royal Dutch Shell (SHEL)
-1%
Unilever plc (ULVR)
-16%
At first glance, only AstraZeneca and Rio Tinto have delivered the level of returns you might expect from a millionaire portfolio. That’s not to say there hasn’t been the potential for higher gains from shorter-term speculation, particularly for millennial millionaires. Investors buying Lloyds’ shares in mid-2020 would have almost doubled their money.
But, in most cases, growth has been modest but consistent. Over a 40-year investment period, BP and AstraZeneca have delivered annual share price growth of 3.4% and 7.2% respectively.
However, capital growth is only one part of the equation. Sarah Coles comments that “The top ten shares held by this group are dominated by blue-chip companies, including those that traditionally pay strong dividends.”
Dividends are a particularly useful source of passive income for people in retirement. Some of these companies have high dividend yields (dividend divided by share price), including 9.9% for Rio Tinto and 5.1% for Aviva. This provides shareholders with a solid return, irrespective of any growth in share price.
Top 10 funds held by ISA millionaires
These were the most popular funds among Hargreaves Lansdown’s ISA millionaires:
Fund
5-year return
Artemis Income
32%
Fidelity Global Special Situations
65%
Fidelity Special Situations
21%
Fundsmith Equity
81%
IFSL Marlborough UK Micro-Cap Growth
67%
Jupiter European
66%
LF Lindsell Train UK Equity
36%
Lindsell Train Global Equity
65%
Rathbone Global Opportunities
92%
Stewart Investors Asia Pacific Leaders Sustainability
44%
It comes as little surprise to see the flagship global funds, Fundsmith Equity and Lindsell Train Global Equity, among the most popular investments. These funds have a long track record of delivering strong returns. That said, their lower exposure to high-growth US tech stocks has resulted in a more muted performance against their global peers in the last few years.
Sarah Coles comments that “When you have a larger portfolio, you have more scope to add specialist funds into the mix too, which is why we see micro-caps and special situations in the top ten.”
Small-cap funds often deliver better returns than large caps in rising markets, due to their higher growth rates. Indeed, Marlborough UK Micro-Cap Growth delivered annual returns in excess of 20% from 2019 to 2021. However, there also tends to be greater downside risk in falling markets, shown by its 10%-16% fall in 2018 and 2022.
It’s a similar story with Fidelity Special Situations. The fund achieved 20% plus returns in 2019 and 2021, interspersed with losses of 12%-14% in 2018 and 2020. However, investing over the long term enabled the ISA millionaires to smooth their returns in market downturns.
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Take away
To reach the million-pound mark, the ISA millionaires contributed their maximum ISA allowance each year. They invested in a diversified portfolio of funds and shares over 20-30 years to deliver the required growth rate.
Whatever the value of your ISA, it’s worth taking the time to pick your ISA provider, as fees can significantly erode its value. To help with this, our experts have compiled a list of top-rated ISA providers.
The post The number of ISA millionaires rises by 69%! Here’s how they made their million appeared first on The Motley Fool UK.
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