How Hargreaves overhauled its buy list after Woodford woes

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How Hargreaves overhauled its buy list after Woodford woes

Hargreaves Lansdown has sharpened its focus on a fund’s performance potential, honed in on individual managers and introduced independent committees as part of the overhaul of its controversial best buy list.

The giant consumer platform’s reformed Wealth Shortlist — previously called the Wealth 50 list — launched today (June 30) with “enhanced selection criteria”, “further risk monitoring and control” and “enhanced governance and oversight”.

Changes include introducing separate groups and independent committees to make decisions about the funds added or removed from the list, removing the fund price as a factor for fund selection and including extra data points and “further challenge” to the selection process.

Best buy lists have come under scrutiny recently despite the Financial Conduct Authority’s 2017 review finding they were a positive tool for investors.

The City watchdog was urged to look into the role such lists played after the Woodford Equity Income saga. 

The criticism was particularly focused on Hargreaves Lansdown’s Wealth 50 list, which featured the now-defunct Equity Income fund on its list from 2014 until the day it was suspended.

It remained on the platform’s list despite an extended period of poor performance and Hargreaves has since confirmed it had concerns about the fund for 18 months before its eventual suspension.

This prompted Hargreaves to announce in January it would be making changes to improve the transparency of its best buy list to improve transparency and adding more detail to its research notes.

Funds now have to go through a six-step selection process to make and stay on the list.

Hargreaves has also added new tools and research for investment trusts, increased its focus on passive funds and ESG portfolios and introduced a new charges comparison tool, separate from the shortlist itself.

Emma Wall, head of investment analysis, said: “We have taken our time to get this right. We have taken the time to better understand what clients want and we continually look to improve the service we offer. 

“To do this, we have conducted extensive research and testing with our clients and listened to what they need and what is important to them, including reviewing our investment process and how we communicated with clients.”

How the list has fared

The average fund featured on the Hargreaves Lansdown Wealth 50 list has returned about £1,631 over the past five years, according to Hargreaves.

By comparison, the average performance of the benchmark indices is £1,560 and the average performance of the IA universe is £1,490 over the same time period.

Hargreaves said: “The majority of our analysts’ fund choices have beaten their sector average and benchmarks. Not every fund has, it’s impossible to get every decision right.”

The platform's UK picks did particularly well. The UK Smaller Companies funds on the list returned £2,277 over the five years compared with a sector average of £1,791.

UK All Companies portfolios on the buy list saw £1,709 returned compared to £1,484 for the sector, while UK Equity Income funds returned £1,539, just above the sector average of £1,465.

Hargreaves admitted that while its selection of funds in the global sector had done well against their peers, on average they had fallen short of global market index and tracker funds, and put this down to the fact the performance of global funds was determined by their US exposure.

As many active funds considered US equities too expensive, this hurt their performance in comparison to the index.

Who made the cut?

Some 68 funds feature on the new shortlist from Hargreaves, including the Jupiter Global Value Equity fund, the Artemis High Income fund, Baillie Gifford’s American portfolio, the Invesco Tactical Bond mandate, Marlborough Multi-Cap Income, Liontrust’s UK Growth, and the L&G UK Mid-Cap tracker.

A total of seven funds have been removed from the shortlist since July last year.

Lindsell Train’s UK and Global Equity funds were removed from the best buy picks as Hargreaves felt the two funds held too large a stake in Hargreaves Lansdown itself to appear on its lists.

The Sanditon European fund was axed when Chris Rice stepped down as manager in October last year and the M&G Recovery fund (once the biggest fund in the IA universe) was removed after Hargreaves announced a loss of conviction in manager Tom Dobell.

It removed Marlborough’s Nano-Cap Growth in a bid to keep the fund at a reasonable size while the BNY Mellon Global Income fund was removed when manager Nick Clay left the company.

Most recently, in early May, Hargreaves ditched the Royal London Sterling Extra Yield Bond fund as it believed the fund “should remain at a size which allows the managers to make the most of the opportunities presented to them”.

Fundsmith Equity, managed by star manager Terry Smith, has famously never made Hargreaves' best buy lists despite being among one of the best performing funds in the IA Global sector, and this has not changed with the launch of its new, overhauled shortlist.

Mr Smith said: “We note the reasons put forward for Hargreaves Lansdown’s continued failure to include Fundsmith in the 'best buy' list. They cite our unwillingness to disclose our portfolio positions to them more frequently than we do to our other investors.

“Moreover, given the poor track record of Hargreaves Lansdown’s best buy lists and the fate of some other funds they have recommended, we would worry if we were included.”

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