An estimated 10,000 people in the UK now hold at least £1m in their Stocks and Shares ISA. That’s a massive mountain of wealth they can enjoy entirely tax-free. And joining this ISA millionaire’s club is a goal many investors share.
But despite only being 10% of the target, the first £100,000 is actually the hardest milestone to hit. So how much money does it take to get there?
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
The road to a six-figure ISA
The ISA annual allowance sits at £20,000, which works out to an average of £1,667 a month. Drip feeding this money each month and investing it at the UK stock market’s average 8% annualised return would push a portfolio over the £100,000 threshold in roughly four and a half years with about £90,000 deposited in total.
Sadly, most people can’t commit that amount of money each month. The good news is, they don’t have to.
At a more modest £500 contribution each month, the journey’s longer, taking roughly 11 years. But here’s the twist: because compounding has had more time to work its magic, the total amount of money actually contributed is only around £66,000.
So the question now is, how can investors contribute even less while also shortening the length of the journey?
The power of stock-picking
By selectively investing only in the best and brightest of businesses through stock picking, investors can end up earning vastly superior returns compared to the wider stock market. And Kainos Group‘s (LSE:KNOS) a compelling example of what’s possible with smart stock selection.
The Belfast-headquartered IT services and software provider has delivered a 19.7% average annualised total return over the last 10 years. That means anyone drip feeding £500 a month at this rate not only crossed the £100,000 mark in roughly seven and a half years, but also only had to contribute around £45,000 to do it.
A strong business with one nagging concern
The latest full-year results, covering the year to 31 March, were genuinely impressive. Revenue jumped 17% to £431.1m, bookings surged 32% to £505.3m, and the contracted backlog rose 18% to £433.9m, giving the business exceptional forward visibility.
What’s more, the fast-growing Workday Products division is now closing in on management’s £100m recurring revenue target by the end of this year.
As CEO Brendan Mooney put it:
“This was a positive year for Kainos, with excellent revenue growth. Our strong customer relationships and significant contracted backlog position us well for further progress in the year ahead.”
However, there’s a glaring issue for investors to watch carefully. Despite 17% top-line growth, underlying pre-tax profits only climbed 2%. Why? Because margins are under pressure.
Higher National Insurance contributions and increased investment spending in its Workday partnership have all squeezed profitability, with margins slipping from 18% to 16%. If management is unable to restore margins in the future, its current growth might be generating higher revenue, but not necessarily creating much shareholder value.
Nevertheless, I think Kainos might deserve the benefit of the doubt. It has a long track record as a quality compounder. And with both its strong order backlog as well as the AI opportunities emerging within the public and private sector, there are multiple long-term tailwinds to capitalise on.
That’s why I already have Kainos shares in my own six-figure ISA. And it’s why I think other investors may want to consider taking a closer look.
Should you invest £5,000 in Kainos Group Plc right now?
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Zaven Boyrazian owns shares in Kainos Group.
