InvestmentsJun 19 2019

Are best-buy lists a good idea?

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Are best-buy lists a good idea?

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.