Woodford would never have made it on to our new Wealth Shortlist!
As Hargreaves Lansdown chiefs radically overhaul their Wealth 50 list in the wake of the Neil Woodford debacle, they insist...
BEST buy lists and tables are part and parcel of the way most of us now shop for financial products. Whether it is for a savings account or mortgage, it is the ‘best’ buys we invariably turn to as a starting point.
Many consumers do not look beyond them, content to trust in the information given. As a newspaper, we publish a number of such tables as we believe they ensure consumers make better financial choices.
Yet not all of the lists that feature online are as robust as they appear, leading sometimes to bitter consumer disappointment – and occasionally downright anger.
Nowhere is disgruntlement more prevalent than in the wealth management industry, where best buy lists are routinely used by online investment platforms to assist investors in picking investment funds for inclusion in their Individual Savings Accounts ( Isas), Self- Invested Personal Pensions (Sipps) or investment portfolios.
Such compilations of ‘ recommended’ funds – wealth managers use other terms to describe them such as ‘super’, ‘elite’ or ‘favourite’ – have become increasingly popular in recent years as many investors have sought (or are being forced) to manage their own investments.
They are provided by big investment platforms such as AJ Bell, Fidelity, Hargreaves Lansdown and Interactive Investor. But the subjectivity – and potential conflicts of interest – involved in drawing up such lists means things can go horribly wrong if a fund does not live up to its billing. With justification, fund buyers can become angry.
NO GREATER (by which I mean worse) example of this was Hargreaves Lansdown’s relentless peddling of investment fund Woodford Equity Income, right up to the fund’s suspension in June last year.
Despite mounting concern about the increase in risky, illiquid holdings contained within the fund run by ‘star’ manager Neil Woodford, Hargreaves Lansdown refused to remove it from its ‘Wealth 50’ – a list of its favourite funds. They hoped Woodford would turn the ship around, but he didn’t.
It is a decision that outraged countless Hargreaves Lansdown customers, who felt that if they had been warned of the fund’s heightened risk, they could have sold their holdings before June last year. With the fund now broken up and investors yet to get all their money back, and Woodford Investment Management no more, some have put their name to group actions against Hargreaves Lansdown for its aggressive promotion of Woodford Equity Income.
Though the legal claims have yet to be issued, Hargreaves Lansdown has decided it is time to overhaul the way it goes about drawing up its fund best buys to make them less of a pushy sales tool. Last week, without once mentioning the ‘W’ word (Woodford), it announced it was replacing its ‘Wealth 50’ with the ‘Wealth Shortlist’ – a roster of 68 investment funds it believes are now fit for purpose.
Separately, it wrote to Woodford investors to tell them of the change. Yes, this time the ‘W’ word did get a mention, but without a whiff of apology over ‘W’, just: ‘We share your disappointment that a better outcome has not been achieved.’ Talk about weasel words!
Along with the birth of the Wealth Shortlist, it has introduced new checks and balances in how it goes about drawing up its list of favourite funds. These include a series of new committees designed to ensure the list remains fit for purpose, that fund choices are more easily challenged and that funds can be swiftly removed if they are deemed not to be living up to expectations. Key employees from outside the investment research team will also keep an eye on the list.
Emma Wall is head of investment analysis at Hargreaves Lansdown. She will play a key role in overseeing the Wealth Shortlist and says the changes have been made with ‘clients and their outcomes at the centre of our thinking’.
Although of scant comfort to those who bought Woodford Equity Income through the platform, she confirmed to The Mail on Sunday that if the fund were around today it would not have made it on to the shortlist. This is because of the illiquid nature of many of the fund’s holdings (a big negative now) and the fact the fund’s investor base was not ‘sufficiently diverse’.
Equity Income’s suspension was triggered by one big investor, Kent County Council, wanting to withdraw its £263 million holding.
The fund would also have failed on the steady drip of outflows, as investors sold out in 2018 and 2019 in response to the fund’s disappointing investment performance.
Indeed, just one of the 68 Wealth Shortlist funds – Marlborough UK Micro-Cap Growth – has exposure to unlisted firms. The £ 1 billion fund, which invests in small UK companies, has 3.3 per cent of its assets in unquoted stocks.
Wall says Hargreaves Lansdown is satisfied with the fund’s current level of unquoted firms, though it would be ‘uncomfortable if it got any higher’. She also said there were no significant investors in the fund (like Woodford’s Kent County Council) that could force Marlborough into doing a Woodford and suspending dealings because they wanted their money back.
The list also contains no property unit trusts – again because of the illiquid nature of their assets. Currently, dealings in some 11 property funds with combined assets of £13 billion are suspended while the portfolios are revalued in response to the economic downturn and cash is generated to meet redemption requests from investors.
There are also no stock marketlisted investment trusts – unlike most rivals’ lists – because Hargreaves Lansdown believes there are not enough shares available in these funds to satisfy demand.
DZMITRY Lipski, head of fund research at Interactive Investor, calls this a ‘ major omission’. He says: ‘Investors should have access to the best in class across the whole funds industry. For us that means including investment trusts.’
Interactive Investor’s Super 60 includes FTSE 100-listed Scottish Mortgage, Murray International and City of London.
Other notable omissions include the £20 billion Fundsmith Equity fund, run by the hugely respected Terry Smith, and the £7.8 billion Lindsell Train Global Equity fund, managed by Nick Train. Both funds have proved hugely popular with investors in recent years on the back of strong investment returns.
Train’s fund i s not i ncluded because Lindsell Train is a big investor in Hargreaves Lansdown.
Last year, the wealth manager said it was removing Global Equity and its sister fund UK Equity from its Wealth 50 ‘to protect the interests of our clients and shareholders, t he i ndependence of our investment process, and the service we provide clients’. Fundsmith’s
omission, says Wall, is due to Smith’s refusal to allow it regular access to him, and information on the fund’s holdings and liquidity.
She adds: ‘Analysis of the latest data suggests it is likely Fundsmith would make the list, but we can’t make exceptions to our enhanced commitment to governance and risk management.’
Smith’s response was brutal. On Friday, he told The Mail on Sunday: ‘Over the years, Hargreaves Lansdown has put forward many excuses for its failure to include Fundsmith Equity in its “best buy” lists. Now it cites our unwillingness to disclose our portfolio positions to them more frequently than we do to our other investors.
‘Leaving aside issues of treating customers fairly, we would note that Hargreaves Lansdown has a fund which competes with ours – HL Global Select Shares – and a highly questionable track record in handling conflicts of interest.
‘We would also question the advisability of transparency. Real time portfolio data did not help with its Woodford recommendation did it?’
Smith added: ‘Did they use that data to save investors from losses? I wonder what excuse they will cite next – no R in the month maybe.
‘The irony is that 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.’