DIY investing giant whittles down selected funds list to Wealth 50
Since it started its favourite funds list back in 2003, Hargreaves Lansdown has grown into a DIY investing behemoth, with more than a million clients and £100bn invested.
With more than 3,000 funds to choose from the Wealth 150 provided an efficient way for investors to identify the small number of fund managers that have the ability to consistently outperform their sector and their peer group.
However tempting it may be to dismiss the list as a marketing ploy, getting on to it can make a material difference to the success of a fund in attracting investors, and Hargreaves’ muscle gives it the ability to negotiate hard on management fees.
Cynics would say that managers refusing to offer a discount will not feature, and there are some notable absentees, but a large amount of effort goes into analysing each fund to sort the wheat from the chaff.
‘Hargreaves’ muscle gives it the ability to negotiate hard on management fees’
Therefore the Wealth 50 (with its 60 component funds!) is a big step for the company in the face of similar initiatives such as Interactive Investor’s ‘Super 60’; in announcing the move research director Mark Dampier says the new slimmed down selection aims to remove confusion, provide more focus, and reflect the difficulty in finding managers that its analysis shows have the skill to consistently deliver market-beating returns for investors.
The list includes 50 actively managed funds as well as ten passive funds for those looking for a cheaper investment that simply follows the market rather than trying to beat it – often viewed as a simpler option for first-time investors.
As investment themes wax and wane in popularity, and one next big thing is followed by another, applying a constant methodology to rate funds of varying types can be useful if you are looking to find a fund that reflects your investment objectives, appetite for risk, and your view of the world.
Selection criteria will differ from platform to platform – HL includes unit trusts, OEICs and trackers, whilst Interactive also includes investment trusts; the funds on the lists aren’t the only ones worth investing in, but if you select one, you are less likely to pick a lemon.
‘the funds on the lists aren’t the only ones worth investing in, but if you select one, you are less likely to pick a lemon’
Other providers include Fidelity Select, AJ Bell Favourite Funds and Best Invest’s Premier Selection, and Selftrade’s Mutual Fund Selector.
There is no definitive way to pick a good fund, and all of the platforms do it differently; just six funds appear in both the Wealth 50 and the Super 60 selections – Lindsell Train UK Equity, Artemis Global Income, FP Crux European Special Situations, Jupiter Strategic Bond, M&G Global Macro Bond and iShares Pacific ex-Japan equity index
Hargreaves says that it undertakes 25,000 hours of research on 1250 funds to compile the Wealth 50, both quantitative, hard figures, and qualitative, assessing what managers say, do and invest in.
This methodology follows managers not funds, insists on a long track record, and tries to separate out skill from luck; it assesses how the manager should have done based on the sector and type of companies they invest in, and then compares it to how they actually did.
Hargreaves says that an average Wealth 150 fund outperforms its benchmark index by 5.8% and sector average by 11.8% whilst on the list, typically for five years; however, out of 24 sectors, only half saw Wealth 150 funds beat their benchmark index, although 17 bettered the average.
So, cynics may say – include a fund on the list, negotiate a discount, investors flock in, and everybody’s happy; however, the level of scrutiny levelled at the platform should not be underestimated.
At its relaunch this week, Hargreaves’ CEO Chris Hill, Mark Dampier and others were grilled by experienced investment journalists, desperate to find a chink in the giant’s armour.
Particularly knotty issues – why did Neil Woodford kept his spot, despite poor performance whilst there was no place for investor’s darling Terry Smith who has performed exceptionally well over eight years?
In defence of its decision, Mr Dampier said he believes Woodford’s long track record of outperformance and experience, weathering previous storms, justifies his decision as a ‘conviction investor’, whereas Fundsmith misses out due to a shorter track record but higher fees than Lindsell Train Global Equity which does a similar job and has delivered a similar performance.
‘no place for investor’s darling Terry Smith who has performed exceptionally well over eight years’
However tempting it may be for investors to conclude that these two high profile fund managers are not being treated equally, Hargreaves believes that Woodford’s long track record should allow him the benefit of the doubt for now.
There were other searching questions levelled as well:
Do fund managers have to agree to a discount to be included? No, but apparently none have refused, because of Hargreaves’ might.
Apparently investment trusts are excluded because the Wealth 50 has sufficient clout to push up share prices and premiums and make it hard for investors to buy in; or they trade like a share and HL doesn’t take recurring revenue – you pays your money and takes your choice.
Hargreaves Lansdown was also challenged on its own platform fees which add a not inconsiderable 0.45% to the annual cost of ownership but that was well rehearsed as being the price to pay for a ‘continually improving service’.
The company has secured a 30% discount across the board on fund charges for all those featured, resulting in an average ongoing charge of 0.57%; adding its service fee results in a total cost of ownership of 1.02% p.a. on average.
The cheapest fund is the L&G UK Index tracker fund at just 0.04% – 0.49% in total.
So, the Wealth 50 may not be for you if you want Terry Smith, newer funds or investment trusts; it may appeal if you are looking to embark on an investment strategy, and less confident to navigate the myriad options that exist – Do it Yourself, Do it With me, Do it For me – just don’t do nothing!