Should You Trust Investment Supermarkets Best Buy Lists?

In the know: Rachel Rickard Straus

Deciding what to invest in is a big question. There are thousands of funds, stocks and investment trusts to choose from. Some might double your money, others decimate it. This is why most investment platforms narrow down all the funds they offer to a shortlist of their favorites. The platforms do not swear that these hand-picked funds will prove to be winners.

But, as I can confirm having previously worked for one of the leading investment platforms overseeing listings, they do a lot of analysis, research, and tracking to offer their best estimate of funds that can grow the wealth of their clients.

At least that’s the theory. In practice, these lists are not without controversy and questions have been raised about their impartiality.

The most high-profile example of their failings is the inclusion of the Woodford Equity Income fund on the Hargreaves Lansdown platform’s Best Buys list until the mismanaged investment fund was suspended in June 2019.

Last week it was announced that there were further delays in the liquidation of the Woodford fund, leaving investors – many of whom bought through Hargreaves – with money still trapped.

While the fund’s failure was of course not Hargreaves’ fault, many investors claim that one of the main reasons they invested was because it was so heavily plugged into the platform.

Hargreaves has since revised its Best Buys list and the process by which funds are recommended. But his endorsement of Woodford reminds all investors not to blindly accept all of their platform’s recommendations.

What are Best Buys lists for?

Jeremy Fawcett, founder of financial consultancy Platforum, says the lists of the most profitable funds are “extremely useful” for investors. After all, millions of households hold too much of their wealth in cash because they are afraid to invest. Reducing the thousands of funds available makes investing less daunting.

He says, “There are three main approaches to investing. There is DIY investing where clients choose their own funds. Then there’s “do it for me”, where platforms recommend a ready-made wallet. Between those two options is “do it with me,” which is where best buys lists come in.”

Wealth management platforms emphasize that best buys lists are not recommendations. Ryan Hughes, head of investment research at wealth manager AJ Bell, says: “Ultimately the decision of which fund to invest in is up to investors and we always encourage them to do their own research.”

So why are the lists all so different?

Financial researcher The Lang Cat compared the best buys lists of five major platforms: AJ Bell, Barclays Smart Investor, Fidelity, Hargreaves and Interactive Investor. What is striking is that despite similar methodologies, there is little overlap between the funds they recommend. More than three-quarters of the 328 funds on the lists appear only once. No funds appear on four or five of the lists and only 17 appear on three.

Hayley Millhouse, chief executive of financial adviser OpenMoney, believes The Lang Cat’s research should sound alarm bells for investors.

She says, “The lack of correlation between fund listings proves that when investors choose a platform, it can make a big difference not only to the fees they pay, but also to the funds they are recommended to. ”

Millhouse adds that there is no recourse available to investors if an investment on a best buys list proves unsuitable. This means that investors are still very much on their own.

Why You Can’t Use Them to Build a Wallet

Investors may be tempted to use a list of best buys as a basis from which to build a portfolio. But that could leave gaping gaps.

For example, some do not include publicly traded investment trusts. This is despite the fact that many investment trusts have performance records stretching back over a hundred years, while 17 have increased their dividend every year for the past two decades – a great comfort to income seekers. .

Hargreaves, AJ Bell and Fidelity do not have investment trusts on their best buys lists. Fidelity says it would not rule out a trust being included in the future, while Hargreaves says they are not because they are more “complex” than rival fund types such as mutual funds. of investment.

This complexity stems from the fact that trusts can borrow money to increase their exposure to stock markets. Moreover, their share price does not always fully reflect the value of the assets they manage.

Interactive Investor includes them. Earlier this month, its chief executive, Richard Wilson, joked that some competitors’ motivation for prioritizing investment funds over investment trusts could be financial.

He said Hargreaves charges customers 0.45% a year if they hold an investment fund, but a flat rate of £45 a year if it is an investment trust. This, he said, “obviously doesn’t influence behavior at all, but it will raise the question simply because of its economics.” Platforum’s Fawcett believes it is in Interactive Investor’s interest to take a different stance on investment trusts to differentiate itself from competitors.

What about low cost index funds?

Most best buys lists are full of actively managed funds managed by named managers. But low-cost alternatives such as index funds — which track the performance of a specific stock market or the price of a commodity — are rare on the ground.

For example, Fidelity has only two index funds in its Select 50 Best Buys list and says it only includes them when they’re deemed “more appropriate.”

This approach means that its own global index fund, Fidelity Index World, is not included in the Select 50 even though, after fees, its past performance is better than that of the three included global funds. Ironically, the Fidelity Index World fund appears on the best buy lists of three rival platforms and is also among the top ten funds bought last year by Fidelity’s own clients.

Holly Mackay of investment site BoringMoney says the exclusion of index funds is not representative of the reality for most investors. “These funds are important building blocks of a portfolio,” she says.

Stick to your choice…for a while

The Best Buys lists are not designed to offer funds that will make the most money for investors over the next 12 months, but over several years. So if someone believes in a fund they find on a list, they should stick with it for a while.

But investment platforms don’t always apply such a long-term approach to the funds they include on their listings. Each year, they remove some and add others. When a fund is deleted, it should ring alarm bells, but it doesn’t always make sense to sell your holdings.

In the past two years, seven funds have been removed from a platform’s best buy list but retained by at least one of its rivals, according to The Lang Cat.

For example, Artemis Global Income was removed in July 2020 from Interactive Investor’s Super 60 list after an “extended period of underperformance”. The fund was kept on the Hargreaves wealth list and has since rebounded, delivering a 40% return.

So can you trust the best buys lists?

As an employee of Interactive Investor before joining The Mail on Sunday, I spent nearly two years overseeing its Best Buys list – and formulating its Best Ethical Funds list.

So I know firsthand what goes into managing such a list. To cut to the chase, it’s grueling work for all concerned.

Every day, Interactive Investor analysts crunch data on the top-bought funds to see if they still deserve their badge of honor. They also met with fund managers and asked them questions about their investments and to account for any drop in performance.

As a member of an investment committee, I would approve or reject changes to the best buys lists. Big decisions. Crucial decisions for many investors. Of course, my colleagues and I have done our best to make the lists as good as possible.

They are set up to help clients find the best options to grow their wealth. But choosing winning funds every time is impossible. If the answers (choice of funds) were that simple, we would all be multi-millionaires by now.

It’s easy to make the accusation that there are conflicts of interest when compiling these lists – that one platform may have an incentive to promote one fund from which it makes a bigger profit than another.

Maybe there’s an element of that on some platforms – I don’t know – but it’s never happened at Interactive. Including a dumb investment fund on a list of best buys to earn some extra cash wouldn’t be worth the reputational damage it did to any platform.

The Woodford debacle made all the platforms look good in the mirror. So my advice? Use these lists as a starting point if you need a helping hand, but no more than that. Also do your own research. Spend some time browsing fund fact sheets and see which individual funds invest in. Check what has been written about them. Remember, you are putting your money on the line.

Some links in this article may be affiliate links. If you click on it, we may earn a small commission. This helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any business relationship to affect our editorial independence.

Comments are closed.