Why ARE so many best-buy Isa funds total duds?

They’re tipped by brokers as the hottest investments your money can buy. So ...

SAVERS have been led to pile billions of pounds into poorly-performing Isa investments that were tipped as best buys, a Money Mail investigation has found.

In a shocking discovery our probe showed the best-buy lists promoted by major investment stockbrokers were full of mediocre funds.

These vital lists, compiled by such websites as Hargreaves Lansdown and Bestinvest, are used by hundreds of thousands of savers to pick investments for their Isas each year but we found just one in ten funds tipped three years ago had ranked among the best performers in its category since then.

The typical fund recommended in the 2012-13 tax-year finished in the middle of the pack when its returns were compared to those clocked up by similar alternatives. According to the law of averages, investors would have had as much chance of getting a decent return if they had picked a fund at random.

The surprising findings raise questions about how the funds were picked. Alan Miller, fund manager at investment firm SCM Direct, says: ‘Best-buy lists are, in reality, no more than a marketing gimmick that helps brokers to sell investments.

‘The funds chosen appear no better than average, which is surprising given they are supposed to be an expertly-chosen selection from a cast of thousands.’

Savers have flocked to online stockbrokers since new rules three years ago forced financial advisers to charge upfront fees, rather than hidden commissions.

Customers now have to pay around £1,500 for an adviser to help them invest a typical £60,000 lump sum in a range of funds. Online stockbrokers, also known as ‘fund supermarkets’, often charge nearer £150 a year for the same thing but the catch is that you have to make all your investing choices yourself.

There are around 2,000 funds available to investors, all of which can be put inside an Isa so, to say the least, it can be bamboozling. To help narrow down options, most fund supermarkets offer a list of between 35 and 150 recommended funds.

For example, Hargreaves Lansdown advertises its Wealth 150 and Bestinvest its Premier Selection. However, it has never been entirely clear how they decide which funds to tip. The brokers all insist that they rely on scientific methods. This typically involves a team of experts analysing the returns generated by different fund managers and interviewing them on a regular basis.

However, fund supermarkets also admit they charge companies to appear on their lists. The deals are shrouded in mystery but some fund managers are thought to pay extra to be promoted to investors.

Money Mail asked SCM Direct to investigate how the funds tipped three years ago have performed since. We looked at the best-buy lists offered by Hargreaves Lansdown, Bestinvest, Charles Stanley Direct, and Chelsea Financial Services.

Funds are grouped into so-called sectors depending on which region or which type of asset they invest in. So that could be such UK shares as Vodafone or BP, or the bonds issued by European companies like BNP Paribas or Volkswagen.

Mr Miller says that over that time you would expect a large proportion of the funds to be among the top performers in their specialism but very few actually achieved this. On average all four brokers’ recommended funds finished around halfway down the pecking order.

The results are most easily explained if you imagine a race between 100 different funds: the best fund would finish first, the middle fund 50th and so on.

On average, funds picked by Hargreaves Lansdown would have come 49th out of a field of 100, just above halfway. Those picked by Bestinvest would have finished 52nd, Charles Stanley 55th and Chelsea 56th.

Crucially, we wanted to find out how many funds from each list were among the top 10 per cent of funds in their category — the real top performers. Just 3 per cent of the funds on the Chelsea Financial Services list made the grade.

Bestinvest had 9 per cent among the very top performers and Charles Stanley and Hargreaves Lansdown each had 15 per cent. In response, fund supermarkets say that three years is ‘not long enough to judge a fund’s performance’ and that savers should invest for between five and ten years.

They also admitted that some funds recommended three years ago have since been removed from their lists.

A Hargreaves Lansdown spokesman says: ‘Three-year performance tells you very little about a fund because over such a short period pure dumb luck is a key contributor to returns. Manager skill becomes apparent only over a longer period.’

A Chelsea Financial Services spokesman says: ‘It is important not to look at fund recommendation lists once and once only; they are always evolving. You need to make sure you are kept updated with any changes that are made so that you can adapt your portfolio over time if you wish.’

A Bestinvest spokesman says: ‘These lists are only a snapshot of funds we rate at a given time and the list evolves constantly as our views change.’

A spokesman for Charles Stanley says: ‘We select funds according to our deep-rooted convictions following extensive research.’