Hargreaves Wealth 150 Best Buy Fund List – A Different View
Date Published: 12 September 2017
Hargreaves (HL) recently announced how well their Wealth 150 list, used by many of its clients to choose investments, has performed since it started in November 2003. But our SCM Direct (SCM) analysis of more recent performance gives a very different view.
The HL View
HL say ‘We are proud of the performance of our fund choices to date. They have on average outperformed their most appropriate benchmark indices by 6.47%, and sector averages by 12.04%, although not every fund has outperformed. Remember, past performance is not a guide to future returns.’
We were surprised at the HL numbers as they appear markedly different to the regulator’s findings on Best Buy lists in its recent Asset Management Study:
’However, our analysis shows that over our assessment period ratings and best buy lists did not on average identify funds that outperformed their Morningstar category benchmarks’… ‘Following the interim report, we were provided with a full history of the Morningstar Analyst Rating, dating back to 2002.’…’However, Gold-, Silver- or Bronze-rated funds did not outperform their Morningstar category benchmarks.’
It also flies in the face of our own analysis on best buy fund lists, published in February 2016 in which we analysed best-buy fund lists offered by Hargreaves Lansdown, Bestinvest, Charles Stanley Direct, and Chelsea Financial Services had performed over three years.
We found that ‘On average, funds picked by Hargreaves Lansdown would have come 49th out of a field of 100. Those picked by Bestinvest would have finished 52nd, Charles Stanley 55th and Chelsea 56th.’
I was puzzled so I looked at HL’s methodology:
- We consider all funds that have ever been on the Wealth 150 and the period(s) they were on the list for.
- For the length of time the fund featured on the Wealth 150 we then calculate four figures:
- Fund return
- HL-Assigned Index return
- IA Sector Peer Group return
- We have included and added back to the fund returns, where applicable, loyalty bonuses from July 2006.
- The Index, Peer Group, and Tracker returns are subtracted from the fund return to give us a figure of outperformance/underperformance per fund.
- We then take the average across each sector of the performance figures.
- The two historic Wealth 150 selections made within the IA Property sector have been excluded from the comparison, since we believe it is not possible to apply a fair benchmark in this sector.
Our view is that this analysis produced by HL does not allow for four key factors:
- A very low percentage of the clients which HL have today would have been a client since the Wealth 150 list started in 2003 (14 years ago). If this is the case, how relevant or useful as it measures performance just over one long period? Currently, HL administers £79 billion of investments on behalf of over 950,000 clients, as compared to £6.1 Bn and 188,000 clients at the end of 2006. Thus, in terms of the impact on clients, one might assume that the performance of the Wealth 150 list over the last few years would be much, much, more important than the first few years but HL does not breakdown the success or otherwise over more recent periods.
- It would seem improbable that many clients following the HL Wealth 150 recommendations would change their funds immediately (if at all) whenever HL changes their list, so the assumption that client returns will ever match the performance of the list, adjusted for HL changes, is questionable? Anyone who works in asset management or any advisor firm will know about inertia in financial products. Many clients, particularly retail clients once they buy a fund, rarely change it. Furthermore, if the fund has performed badly, many individuals will decide to keep the fund on the view that it is a bad time to sell or because they do not want to crystallise a loss. Thus, a fund might come off the HL Wealth 150 after years of poor returns or another reason, but how many HL clients holding that fund would sell in practise?
- How much of the HL quoted outperformance came from the HL 150 list possibly being more successful in its early years rather than the last few years? HL doesn’t break down its performance in terms of more recent periods. HL presents its information differently to the funds on its platform whom are required by the FCA to present their performance over five complete 12-month periods (where available)
- HL has stated that when it calculated the performance ‘We have included and added back to the fund returns, where applicable, loyalty bonuses from July 2006.’ Is this fair? If HL are going to improve the reported performance calculations by adding back the loyalty bonuses received by HL clients, should it not at the same time deduct its own charges? HL presents its information differently to the funds on its platform whom are required by the FCA when reporting performance ‘based on gross performance, the effect of commissions, fees or other charges is disclosed.’  Given HL typically charges clients 0.45% pa today, which is often regarded as higher than its competitors, would it not be fairer to show the impact of HL’s charges over the years on the performance received by their clients?
SCM Direct decided to conduct research on two more recent time periods. We looked at a Wealth 150 list from January 2012 and a Wealth 150 list from January 2014 to see how the recommended funds from each list have performed since then; i.e. over a more than three and five-year period.
We did not analyse any funds that had been merged into a different strategy as the performance would then simply be the new fund rather than the fund that clients held at the beginning.
If the manager or the fund group changed, we kept the fund within the analysis. We analysed all funds on this basis with available performance data and sector performance data sourced from FE analytics.
January 2012 HL Wealth 150 list findings
Of the original 124 funds on the HL wealth list, our analysis interrogated 110 funds. The average percentile ranking of the funds analysed from the 1st January 2012 to the end of August 2017 was 53rd (i.e. just below half way).
We then analysed this performance on individual calendar years, and analysed performance against its sector peers in the first calendar year (2012), second year (2013), third year (2014), fourth year (2015), and fifth year (2016).
You might think the list would be concentrated in funds that perform in the top 25% of competing funds over the years following their selection. Not so! The chance of the selection of funds being top quartile over future years differs very little from what investors would expect from chance i.e. close to 25%.
Furthermore, there were many incredibly poor performing funds, from the January 2012 list over the period of 1st January 2012 to 31st August 2017.
Listed below are funds that were 90th percentile or worse vs their peers over this period – these funds represented 15% of the funds, by number, of those analysed.
Sources: SCM Direct using FE Analytics data
January 2014 HL Wealth 150 list
Of the original 93 funds on the HL wealth list, our analysis covered 87 funds. The average percentile ranking of the funds analysed from the 1st January 2014 to the end of August 2017 was 55th percentile.
Once again, we analysed this performance in individual calendar years against sector peers in the first calendar year (2014), second year (2015), and third year (2016).
Again, our analysis showed that the chance of investing in a fund from this list that is top quartile is not much more or less you would expect from chance (i.e. around 25%).
Furthermore, there were many poor performing funds, when analysed against their peers using FE analytics within the January 2014 list over the following period – 1st January 2014 to 31st August 2017.
Listed below are funds that were 90th percentile or worse vs their peers over this period – these funds represented 24% of the funds by number analysed
Sources: SCM Direct using FE Analytics data
SCM Direct’s view
As with so many investment platform ‘Best Buy’ lists, our view, based on the analysis above, is that the Hargreaves Wealth 150 List appears to be offering clients the same chance of investing in a fund that beats its competitors, as tossing a coin – 50/50.
© Image ICMA Photos – Coin Toss – Link
Please Note: Past performance should not be seen as a guide to future returns. The value of investments and the income from them can go down as well as up and investors may not recover the amount of their original investment.
SCM Direct is a trading name of SCM Private LLP which is authorised and regulated by the Financial Conduct Authority to conduct investment business.