How ISA millionaires invest their money

The number of investors with at least £1 million in their AJ Bell ISA has more than doubled over the past three years. That is despite rising interest rates causing headwinds for equity and bond markets.

Today’s AJ Bell ISA millionaires have shown a preference for investing in individual shares rather than funds, with 75% of their portfolios sitting in stocks.

Shares

Those with larger amounts in their ISA may be better placed to take the higher risks associated with investing in individual equities and have a big enough pool of assets to diversify appropriately.

Big blue-chip names like Shell, Lloyds and GSK are the most popular stocks with AJ Bell customers who are an ISA millionaire. US-listed tech giants including Nvidia, Microsoft and Apple also feature in portfolios but far more have large cap dividend-paying stocks from the UK market than overseas-listed stocks which pay little or no income to shareholders.

This trend could reflect how the average age of AJ Bell’s ISA millionaires is 72, so many customers may be in retirement and want their investments to generate an income. If a £1 million portfolio yielding 4% generates an income of £40,000 a year, this could be a comfy retirement, especially when you add in state and private pensions.

Five out of the top 10 most popular stocks with AJ Bell’s ISA millionaires offer a more generous dividend yield than the highest level of interest paid on the best-buy instant access cash savings account. As of 19 February 2024, Paragon Bank had the highest interest on instant savings at 5.16%. In comparison, certain stocks in AJ Bell ISA millionaire portfolios were offering significantly higher prospective yields including 9% from M&G, 8.5% from Legal & General and 7.9% from HSBC.

Cash interest rates have been trending down in recent months amid expectations for the Bank of England to cut rates. In contrast, many stocks on the market continue to pay a growing stream of dividends which reinforces the attraction of equities over cash for many investors.

You don’t have to pay any tax on the gains you make from savings or investments in an ISA or on any income you receive from these investments.

Dividend reinvestment has historically been a way to supercharge returns in an ISA portfolio thanks to compounding benefits. Using dividend money to buy more shares allows an investor to increase their ownership in a stock at no extra cost. They should receive even more dividends at the next round of distributions due to their increased ownership, and the company might have even grown its dividend as well. When you repeat this cycle over the space of decades, the compounding benefits can really shine through and boost the investor’s wealth.

AJ Bell ISA millionaires show a preference for solid, established businesses that have been doing the same thing for decades. There are no speculative, blue-sky companies in their portfolios that have a bright idea but do not generate revenue.

There also appears to be a buy and hold mentality given the number of spin-offs in the ISA millionaire portfolios. Shares in Haleon, Woodside Energy and Jackson Financial were distributed free of charge to shareholders of GSK, BHP and Prudential respectively as the parent companies restructured and demerged holdings. These gifted stocks look as if they’ve been left alone in investors’ portfolios rather than the usual temptation of cashing out of a demerged business.

Funds

Fundsmith Equity is the most popular fund with AJ Bell’s ISA millionaires. It has a quality/growth investing style which means it looks for companies that can generate strong returns, have rock solid balance sheets and have quality characteristics such as strong brands or high levels of recurring revenue.

While Fundsmith has underperformed the broader global stock market over the past three years, its longer-term track record is good and AJ Bell ISA millionaires might have felt comforted parking their money in such a fund.

Choosing funds that invest in companies around the world which are delivering strong levels of earnings growth is a common theme among the ISA millionaires as there are other popular global equity names alongside Fundsmith. These include Rathbone Global Opportunities and Lindsell Train Global Equity.

It makes sense that a buy and hold investor wants to spread their risks by not focusing on a single country, while at the same time avoiding more speculative companies and backing ones which are either market leaders, market disrupters or have enduring qualities.

Investment Trusts

The idea of backing tomorrow’s potential market leaders is appealing to investors who are happy to risk their money in blue sky companies. Doing so via an investment trust helps to spread the risks across a portfolio of companies with bright ideas but not necessarily any profits. That explains why Scottish Mortgage is by far the most popular investment trust among AJ Bell’s ISA millionaires, with twice as many people holding it versus the second most popular product.

Scottish Mortgage might have had a tough few years, but it has enjoyed quite a few bumper periods in the past and many investors have stuck with it through thick and thin.

City of London Investment Trust is widely held, providing exposure to large cap stocks on the UK market. Some view this as a ‘best ideas of the FTSE 100’ trust, appealing to people in retirement who want to collect a regular stream of dividends. Income is also the reason why HICL Infrastructure is the third most popular trust on our list, having gained a reputation for paying out big dividends.

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