Hargreaves Lansdown’s decision to shrink its Wealth 150 buy list to a Wealth 50 equivalent has provided something for everyone: a mild war of words with affronted fund managers, a renewed focus on fund charges, and a chance for advisers to compare their own selections with the direct-to-consumer giant’s new choices.
On the comparison front, research from our sister publication, Asset Allocator, shows discretionary fund managers’ favourite funds comfortably outperform Hargreaves’s selections when it comes to UK equities – partly because the firm has kept the faith with the likes of Tom Dobell and Neil Woodford. But there’s not much between them otherwise, and in one particular area – Asia ex Japan equities – the platform is the clear winner.
There are obvious accompanying benefits for the platform, too. By scaling down its list, Hargreaves has been able to exert even more pressure on fund provider prices. Its size means there isn’t much read-across for advisers and other fund selectors; almost no one else in the retail space, with the exception of the vertical integrators, has the same kind of clout.
Others’ buy-lists are also shrinking, but for different reasons. Next month we’ll be looking in more detail at the advisers who are starting to whittle down their preferred group of funds to an ever-smaller pool.
In the DFM world, the trend is in the opposite direction. Our annual survey published last summer found that more buy lists had increased in size than shrunk over the past three years.
But there is one trend that is being bolstered by the actions of both Hargreaves and DFMs: the rise of segregated mandates. And the changes taking place on this front could have significant consequences for how fund selectors of all stripes conduct their due diligence processes.
While Hargreaves’s buy-list rejig attracted the headlines, its shift to sub-advised mandates within its multi-manager funds might prove more significant. These funds now run £9bn between them, and the platform isn’t alone in making such a move. Brewin Dolphin did similar last year, and more are likely to follow as they scale up.
The benefits are obvious: mandates give buyers the ability to negotiate better deals, and they can also be tailored to exact specifications. So whereas funds tend to hold small cash weightings for insurance purposes, selectors who do their own asset allocation may insist their mandate be fully invested.
What are the consequences for the rest of the industry? Well, as big buyers move away from the relatively transparent world of open-ended funds in favour of these private mandates, the former look like they’re losing assets. Hence the apparent £300m slump in Threadneedle UK Equity Alpha Income’s assets under management at the end of 2018, and a £500m shift out of the Jupiter Income unit trust in early January, both as a result of Hargreaves’s shift.
Ascertaining where investor money is going – a useful exercise in general, and an invaluable one on occasions such as the months preceding the property fund gatings of 2016 – is becoming that bit harder.
Mandates might also have one other consequence for those seeking to make use of their scale. Fund selectors may prove less likely to sell out of these uniquely tailored positions than they are to get rid of their holdings in an open-ended fund available to all.
There’s always a balance to be struck between long-term conviction investing and the need for flexibility – and that equilibrium may be starting to shift towards the former attribute.
