James ConeyJun 19 2019

The ultimate weakness of best-buy lists

Search sponsored by

Here is an inconvenient fact that defies the current rhetoric: unit trusts on best-buy lists offered by fund supermarkets do tend to perform better than ones that are not.

In the wake of the Neil Woodford scandal (yes, a scandal, try telling ordinary savers with their money locked up that it is not), that is an awkward truth.

You can find the basis for this statement in an occasional paper published on the website of the Financial Conduct Authority in 2017. It was an independent study carried out as the regulator did its asset management market study.

The academics behind it found that best-buy fund lists were incredibly influential, in that those on them did receive significantly higher amounts of money that those that did not.

But the analysis of them found a “statistically significant” outperformance. That some of this research was carried out in period that was before the Retail Distribution Review shows that even with accusations of commission bias, these funds did do better.

Of course, this is based on averages and you can always find outliers – such as the Woodford Equity Income fund.

All this though does not mean that best-buy lists donot deserve major scrutiny once more.

The most notable best-buy list is the Wealth 50 offered by Hargreaves Lansdown, and it is also the one that finds itself under the most scrutiny following the Woodford fiasco.

Can you just imagine the furore if this whole thing had happened before the RDR?

What everything comes down to is transparency. Best-buys lists are fine and helpful – there are FCA rules governing commission and impartiality.

Communication is critical, and this is so often where fund companies go lacking. Their idea of explaining why a fund makes a list is a long way from what mine is.

Too often they involve gushing tributes about what the fund manager will achieve, and not enough about exactly that justifies the selection.

For example, with Mr Woodford, Hargreaves Lansdown needed to have a frank acknowledgement of his diabolical performance at the time the fund was selected for the Wealth 50. It was, after all, ranked 257 out of 258 funds at the time.

Hargreaves Lansdown is guilty, above all, of falling for that old financial adviser curse of never having conviction about when to get out of a fund.

So many advisers, I find, are good at telling people when to get in to something, but not at when to sell up.

That, in the end, is the ultimate weakness of a best-buy list.

Stop mocking and start educating

The kicking of corpses in the fallout from the Woodford scandal was desperately unseemly.