Hargreaves Lansdown's buy list under fire

Alan Miller, partner at wealth management firm SCM Private, has taken aim at the FTSE 100 listed online broker and advice firm's Wealth 150 list, questioning the methods used by the company to determine which funds qualify.

The Wealth 150 list, which has been running since 2003, is widely publicised in the national press, and is used as an industry guide to the top fund picks.

But Mr Miller said despite Hargreaves recently announcing how well its Wealth 150 list has performed since it began in November 2003, "our SCM Direct analysis of more recent performance gives a very different view”.

His comments come in the wake of a report from the Financial Conduct Authority (FCA) stating in July that best buy fund lists on platforms, including, but not exclusively Hargreaves Lansdown, tend to have funds on the lists which are "affiliated" to the company in some way.

Earlier this year the SCM founder analysed the entire Investment Association fund universe, using FE performance data for the full year from 2016.

He said the analysis he conducted showed, on average, funds picked by Hargreaves Lansdown would have come 49th out of the top 100 funds across all sectors, ranked by performance.

Those picked by Bestinvest would have finished 52nd on average, Charles Stanley 55th and Chelsea 56th.

Mr Miller contrasted that with a statement on the Hargreaves Lansdown website about the performance of its buylist since 2003, which said: “We are proud of the performance of our fund choices to date.

"They have on average outperformed their most appropriate benchmark indices by 6.47 per cent, and sector averages by 12.04 per cent, although not every fund has outperformed."

Mr Miller said the disparity between his analysis and Hargreaves Lansdown’s is due to the latter’s methodology, which he considers to be flawed.

Hargreaves Lansdown’s methodology considers all funds that have ever been on the Wealth 150 and the periods they were on the list for. Then for the length of time the fund featured on the Wealth 150 the company calculates four figures:

1) Fund return

2) Hargreaves Lansdown-Assigned Index return

3) Investment Association Sector Peer Group return

4) Where applicable, loyalty bonuses from July 2006, have been included and added back to the fund returns.

The index, peer group and tracker returns are then subtracted from the fund return to give a figure of outperformance/underperformance per fund.

Hargreaves then takes the average across each sector of the performance figures. 

But Mr Miller criticised this approach.

“A very low percentage of Hargreaves clients today would have been a client since the Wealth 150 list started. If this is the case, how relevant or useful [is it ] as it measures performance just over one long period?  

"Currently, Hargreaves administers £79bn of investments on behalf of over 950,000 clients, as compared to £6.1bn and 188,000 clients at the end of 2006.   

"Thus, in terms of the impact on clients, one might assume that the performance of the Wealth 150 list over the last few years would be more important than the first few years but Hargreaves does not breakdown the success or otherwise over more recent periods.”

Mr Miller said he wondered how much of the positive performance of the Wealth 150 is from the early years of the buylist.

He said: “Hargreaves presents its information differently to the funds on its platform [which] are required by the FCA to present their performance over five complete 12-month periods.”

Also, while Hargreaves Lansdown adds to the performance of the funds on its best buy list the “loyalty bonuses” received from the fund houses by Hargreaves Lansdown clients, this is not necessarily the same for clients of other platforms, Mr Miller added.

If Hargreaves Lansdown can flatter the performance of the Wealth 150 list in this way, then it should also deduct its own charges from the returns it lists for the funds, he said.

Hargreaves Lansdown’s platform charge of 0.45 per cent is also greater than that of many of its peers, Mr Miller said.

Danny Cox, head of communications at Hargreaves Lansdown, was presented with Mr Miller’s analysis.

He said: “The Wealth 150 has made life easier for hundreds of thousands of our clients.

"Since launch in 2003, our fund selections have on average outperformed their peer groups, exceeded the returns of comparative tracker funds and beaten the most relevant benchmark indices.”

Dan Farrow, independent financial adviser at SBN Wealth in Chelmsford, said platform buylists play "no role whatsoever" in his investment decisions, and singled out Hargreaves Lansdown's list for criticism. 

He said he regards the list as "biased", with commercial relationships between Hargreaves Lansdown and the fund providers influencing the choice of funds chosen. 

Mr Cox said there is no commercial relationship beyond the natural one between a fund platform and a fund provider, and rejected the idea that the company benefits commercially in any way from choosing certain funds over others for its buylist. 

He said: "Hargreaves Lansdown’s investment service has a long history of negotiating significant fund discounts, currently averaging 22 per cent on the Wealth 150 list, and all of these discounts are passed onto our clients."

SCM's research covered 87 funds of the original 93 on the Hargreaves wealth list.

According to SCM, the average percentile ranking of the funds analysed from the 1 January 2014 to the end of August 2017 was 55th percentile.

The wealth management firm analysed this performance in individual calendar years against sector peers in the first calendar year (2014), second year (2015), and third year (2016).

"The analysis showed the chance of investing in a fund from this list that is top quartile is not much more or less you would expect from chance, i.e. around 25 per cent, " Mr Miller said.

When analysed against their peers using FE Analytics within the January 2014 list over the following period – 1 January 2014 to 31 August 2017, Mr Miller stated there were many poor performing funds.

david.thorpe@ft.com