There will undoubtedly be plenty of consequences from the suspension of Neil Woodford’s Equity Income fund.
One of them is likely to be increased scrutiny of retail platforms’ best-buy lists.
This is because many are questioning Hargreaves Lansdown’s seemingly unremitting commitment to the fund, only dropping it from its Wealth 50 list once trading had already been suspended.
The issue has raised the old question of whether these lists constitute financial advice and therefore should be regulated as such, or whether they should be left alone and ultimately stay in the hands of platforms, who are catering to execution-only investors.
But ultimately, the issue does show that the inclusion of a fund, even if the original intention is to create a filter for the overwhelming number of funds on the market, is a matter of opinion and judgement, as much as quantitative analysis.
In the past two weeks, Hargreaves Lansdown has come in for considerable flak for its commitment to Woodford Equity Income, largely because it has tens of thousands of investors exposed to the £3.7bn fund run, but also because its business model steers people towards it.
Many of the funds recommended on its best-buy list are discounted. According to Platforum, the average fund discount on a Wealth 50 fund is 21 basis points – Hargreaves says it is is 30 – but clients are charged at a premium for the platform fee of 0.45 per cent (many others charge in the region of 0.35 per cent).
This means the overall cost is the same through the platform, but the discount on the fund and the appeal of the platform itself draw investors in, so generating fee income for the platform.
Jeremy Fawcett, head of Platforum, says: “Hargreaves Lansdown don’t benefit from that [discount] – that is handed on to the end consumer – but it does mean that if you are choosing to invest through that platform, you are being implicitly encouraged to try funds that are on the select list.
“What it’s increasingly moving towards is that you buy into the ecosystem: ‘I’m going to use this platform because it’s a good platform; it’s a bit expensive, but the with the discount, the cost overall is the same as anywhere else.’
“Where that falls down is when the bond of trust has broken, and that’s why the Hargreaves Lansdown share price has fared badly recently.”
Standing firm
Certainly the company stuck by the fund until the end.
As late as May 3 it put out the following statement: “All active managers go through periods of underperformance, and such times do test investors’ conviction.
“However when it comes to investment, we believe patience is a virtue, and the alternative of frequently chopping and changing your portfolio to chase performance is likely to be damaging in the long term.
The statement goes on: “This isn’t the first time in his career Neil Woodford’s underperformed.
“We’ve stuck with him during difficult times before, and in the past investors have been rewarded for such patience.
“Our analysis of Woodford’s long-term track record gives us the confidence to retain the Equity Income fund on the Wealth 50, and we think he’s still got the skill to deliver excellent long-term performance.”
It was only the day after suspension of the fund that the company announced it was dropping it from its Wealth 50 as well as suspending its platform fee on the fund, since investors obviously can no longer trade.
A company statement on June 5 read: “This is a frustrating and difficult time for clients and we are doing what we can to support them.
“We have been in communication with Woodford Investment Management to explain why we think this is the right thing to do and have put pressure on them to do the same.”
Other platforms that initially stuck with the Woodford Equity Income fund were Close Brothers Asset Management’s self-directed service and The Share Centre, although these two dropped the fund after it was suspended.
Those that dropped it last year include: Bestinvest, Charles Stanley Direct, Chelsea Financial Services, and AJ Bell YouInvest.
Tilney, for example, through its Bestinvest platform, removed the Equity Income fund from its select list in March 2018, citing: “considerable changes to the portfolio, albeit a function of the manager’s evolving opportunity set, which has seen a notable increase in exposure to both earlier stage growth businesses, including unquoted companies, as well as UK cyclical stocks”.
Indeed, Dynamic Planner said the fund’s risk profile had increased from an eight to a nine based on its holdings at the time of suspension.
The recent problems with the Woodford Equity Income fund were prompted by too many people wanting to redeem their investments from a fund that was heavily focused on unlisted stocks, and this has prompted inevitable calls for these lists to be regulated.
Bella Caridade-Ferreira chief executive of research consultancy Fundscape, says: “I think all fund selectors should be regulated and not just buy lists.
“Funds and managers are regulated, but anyone can happily describe themselves as experts and set up as fund selectors — they could be throwing darts at the newspapers for all we know.”
The responsibilities of investment providers
In the wake of the fund’s suspension, Andrew Bailey, chief executive of the Financial Conduct Authority, suggested these lists could face scrutiny.
He said in the Financial Times last week: “What are the responsibilities of investment platform providers when recommending so-called best buys? It is important that platforms should exercise their responsibilities thoroughly and in a timely fashion.”
But Mr Fawcett says the FCA is not keen to regulate buy lists, because it is useful for investors to have an outlet of guidance without having to resort to going to a regulated financial adviser.
He says: “Having a shortlist provided is a really useful filter; we’re talking about non-advised, where the consumer is on their own. If they don’t feel comfortable making that reduction from a list of 100-150 funds then at that point they need to take professional advice.
“The FCA don’t want to outlaw that first filter. People find that list useful, they do use them – a quarter of investors use these select lists.”
The question, then, is how platforms compile these best-buy lists.
Many will start with quantitative analysis, with data points such as the size of the fund, past performance, length of time the fund manager has been in place; this initial selection will filter out a whole range of funds, and then the analyst will go into more detailed analysis of the fund, involving discussions with the fund manager.
Key Points
- The suspension of the Woodford Equity Income fund has put best-buy lists under the spotlight
- Hargreaves Lansdown draws customers in with its discounted fee model
- Debate exists over whether best-buy lists should be regulated
What has also happened in recent years is that the fund lists have shrunk in number, from 150 funds to 50-100. This means the selection requires higher “conviction” from the platform, according to Mr Fawcett.
Last weekend, the chief executive of Hargreaves Lansdown Chris Hill apologised to investors who had used the best-buy lists, saying he shared their “disappointment and frustration”.
He added: “We are confident in the robustness of how we analyse, research and compile our favourite fund list with a focus on ensuring best value for clients – nonetheless, we are reviewing this specific situation to ensure we learn from it.”
Separately, Danny Cox, head of communications at Hargreaves Lansdown, says: “We offer a great service and reduce the cost of investing by negotiating hard. There’s 13,500 different investments – we know our clients like the great service, investment range, the helpdesk, the app, and they can view the investment online.”
Over the next few weeks, it looks like select lists, and the Wealth 50 in particular, will come under a lot more scrutiny.
Melanie Tringham is deputy features editor of Financial Adviser and FTAdviser.com
