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Hargreaves Lansdown has responded to mounting scrutiny of ‘best buy’ fund lists by the City regulator with an assessment of the performance of its influential ‘Wealth 150’ recommendations.
Although ‘Wealth 100’ would be a better name after the number of funds gaining the broker’s approval dwindled to 90 from the 141 it started with in 2003, its list has nonetheless served investors well, if Hargreaves’ figures are to be believed.
According to the company, Wealth 150 funds have on average delivered a 12% higher return over funds that have not passed what it calls its ‘rigorous’ analysis.
In a riposte to the Financial Conduct Authority, which has said funds on ‘best buy’ lists tend not to beat the stock markets in which they invest, the UK’s largest fund supermarket claims its recommendations have returned 6.5% more than their benchmarks and 13.5% more than comparable index-tracking funds.
The investment retailer argues it offers these high quality products at low prices, pointing to the 0.61% annual charges investors pay on Wealth 150 funds compared to the 0.74% they would pay for them elsewhere.
Critics will say the discounts it has negotiated with fund groups don't offset the higher platform charges its customers also have to pay. Hargreaves' Vantage platform charges 0.45% a year compared to 0.2%-0.4% for rivals such as Charles Stanley, Barclays, Fidelity and Tilney Bestinvest.
A closer look at performance reveals a more mixed picture as well. Mark Dampier, Hargreaves’s head of research, admits ‘we haven’t got everything right’ with the firm’s fund selections underperforming their stock market index in 10 out of 24 sectors.
Hargreaves’ figures show its Wealth 150 picks have done best in the UK, particularly in smaller companies, but have done poorly in global funds and those investing in North America and technology.
On the former, its UK Smaller Companies recommendations have smashed other funds by an average of nearly 47% (see first table) and outperformed their index by over 55%. This testifies to what the company calls ‘the rich nature of this hunting ground’ for skilful stock pickers.
|Outperformance of average active W150 fund vs sector||Vs index||Vs average tracker fund (where relevant)|
|UK Smaller Companies||46.80%||55.30%|
|UK All Companies||23.50%||13.90%||26.80%|
|UK Equity Income||8.20%||3.30%|
|GBP Strategic Bond||13.50%||8.20%|
|Global Emerging Markets||14.20%||3.80%|
|Asia Pacific ex Japan||11.60%||-2.30%||15.40%|
Source: Hargreaves Lansdown
Similarly its choice of funds in the popular UK Equity Income sector have beaten the competition by just over 8% on average and returned more than 3% over the index.
Its choice of funds in the big UK All Companies sector has been more impressive, outpacing their rivals by 23.5% and leaving the FTSE All-Share trailing by 13.9%.
Its fund selections in Europe, global emerging markets and Japan have also done well.
Crucially, the broker says its UK All Company recommendations have beaten funds tracking the FTSE All-Share by nearly 27%.
This is an important point for the broker which in recent years has bowed to the massive shift by investors into cheap index-tracking and exchange traded funds (ETFS) by adding 13 of the ‘passive’ funds to the Wealth 150.
Like Citywire, which rates the performance of individual fund managers, Hargreaves' Dampier remains convinced there is a small pool of active stock pickers, such as Neil Woodford, Nick Train and EdenTree's Robin Hepworth, who can beat their index over the long term.
Although Dampier acknowledges tracker funds can be good for first-time investors and anyone looking for an efficient way to access some stock markets, he shows that over time even their small costs can add up significantly.
For example, in the 14 years it has run Wealth 150, the average FTSE All-Share tracker has fallen 28% behind the index as a result of charges, says Hargreaves.
The firm explains this is 'because the index return is purely theoretical, based on costless investment, which a tracker cannot match because the charges still do detract from index returns. It is therefore not possible to achieve the index passively.'
|Underperformance of average active W150 fund vs sector||Vs index||Vs average tracker fund (where relevant)|
|Global Equity Income||-10.90%||-6%|
|North America Smaller Companies||-2.20%||-4.30%|
|Technology & Telecoms||-6.30%||-6.50%||-26.70%|
Source: Hargreaves Lansdown
In contrast to its success on UK domestic funds, Hargreaves has failed in the home of capitalism, North America. Its chosen funds have lagged their sector average, the S&P 500 index and US tracker funds by 4.5%, 8.6% and 7.1% respectively (see second table).
As a result it has not had an active US larger company fund in Wealth 150 in over four years and doubts it ever will. 'The US stock market is the largest and most heavily researched in the world, and this is one of the main reasons we believe we have had difficulty finding active fund managers who consistently outperform.
'We therefore currently prefer a low-cost tracker fund for larger exposure to larger US companies,' it explains.
The knock-on effect of that failure is a poor record in global funds, which invest around half their assets in the US.
It presumably also explains why technology has also been a dismal area for its tips with nearly 27% underperformance against funds tracking the Nasdaq index.
Again, Hargreaves has given up trying and no longer includes a tech fund in the Wealth 150. 'We are increasingly of the opinion that the structure of the market, which is dominated by technology giants such as Facebook and Amazon, makes it difficult for fund managers to add significant value above the index,' it says.
The shrinking number of funds on Wealth 150 also reflects big changes in investment. Hargreaves says the UK funds market is polarising between high performance active funds at one end of the spectrum and cheap tracker funds at the other.
'The rump of mediocre funds in the middle will find themselves increasingly squeezed as investors quite rightly become more selective when it comes to getting value for money from their investments,’ it warns.
It suggests the five principles it uses on Wealth 150 will improve investors’ chances of avoiding those unattractive funds:
Look for skilful, not just lucky, fund managers who can demonstrate good stock picking, not just an investment style that is in favour.
Look for a long-term track record: it suggests a seven-year period is usually long enough to test a fund manager.
Follow the manager not the fund: funds are just a legal structure, what drives returns is the manager in charge of your money.
Invest with high conviction and pick a fund manager who you would continue to back even during an extended period of underperformance.
Reduce fund management fees and your costs of investing wherever possible. Possibly a double-edged tip for Hargreaves but not one that anyone will disagree with.