Buylists, such as Money Observer’s 2019 Your Fund Choices, are a good starting-point for investors who want clear guidance, says Faith Glasgow.
Around 3,000 funds are listed in the Investment Association’s sector classifications and are readily available to private investors, so it’s easy to understand why many people trying to set up or add to a portfolio may feel like rabbits in the headlights, overwhelmed by far too much choice. And that’s before you throw in another 400-plus investment trusts and the ever-expanding universe of ETFs tracking market indices or ‘weighted’ versions of them.
That’s why one of the most important ways in which online brokers and platforms should be able to add real value for their bemused customers is by doing the legwork for them – sifting through performance figures and assessing fund managers’ processes and philosophies to produce a ‘buylist’ of the highest-quality, best-value, most consistent fund choices in the market. These are not necessarily going to be the current top performers, but over the longer term they are the funds that should in theory deliver the goods, though of course nothing is guaranteed.
There’s nothing new about the idea of buylists. For instance, Hargreaves Lansdown (HL) first brought out its Wealth 150 shortlist in 2003. Money Observer has run its Rated Funds since 2013, and they have been used by our parent company interactive investor (ii) during that time.
Clearer signposting called for
Indeed, just time for a quick promotional aside: February will see the publication of the 2019 edition of Your Fund Choices, comprising the updated 267-strong selection of Money Observer’s Rated Funds, investment trust and ETFs (you can pre-order here). We’ll include a concise version of the line-up with the March issue of the magazine.
However, while we believe a comprehensive selection is right for Money Observer’s engaged, enthusiastic readership, one trend that appears to be gaining traction is the creation of shorter, more focused lists for investors who want clearer signposting in their investment journey.
It’s not hard to explain: as the onus on us all to take responsibility for our own finances increases and the savings environment becomes more complicated (think pension freedoms, new Isa types, continuing poor savings rates), brokers are keen to reach out to a more diverse cross-section of potential customers – many of whom are likely to be unfamiliar with the whole business and on the lookout for a firm, supportive investment hand to hold.
Thus, January saw the launch of two high-profile buylists. Interactive investor showcased its Super 60 list of funds, trusts and ETFs drawn from the Rated Funds universe. The investment committee who made the selection (which included members of the Money Observer editorial team) adopted a matrix approach, aiming to identify a low-cost (passive), core, income, smaller-cap and adventurous option for each of the main markets and asset types. Something for everyone, in other words.
Hot on its heels, HL launched its Wealth 50 selection of open-ended funds and trackers (so far comprising more than 60 choices, but due to be trimmed further), a revamped, ‘higher conviction’ version of the Wealth 150, in response to customer feedback.
A look at the two lists reveals some surprises, though – in particular the fact that there is little commonality between them, considering both ostensibly set out to deliver the best long-term performers. Just seven names appear on both lists: Artemis Global Income, FP Crux European Special Situations, Jupiter Strategic Bond, iShares Pacific ex Japan, Lindsell Train UK Equity, M&G Global Macro Bond and Royal London Sterling Extra Yield. Admittedly, ii makes a point of choosing investment trusts where they seem more appropriate than an open-ended fund (for example in less liquid asset classes or where dividend growth is key), whereas HL sticks exclusively to open-ended funds; but nonetheless, one might expect more common ground.
This might be explained to some extent by the fact that HL highlights the “average 30%” cost savings it offers customers on its Wealth 50 candidate funds by negotiating management fee reductions. This inevitably raises the question of whether managers have made the Wealth 50 cut, to some extent at least, on the basis of their willingness to discount their fees.
The absence of Terry Smith, manager of Fundsmith Equity, on HL’s list is a surprising case in point. Fundsmith was the most popular fund bought on ii in 2018, top of the IA global sector over five years, and top-decile over one and three years – but Smith was evidently not prepared to reduce his management fees for the privilege of a place on the HL list. He’s a high-profile example, but have there been other high-quality managers who refused to take a hit on fees and therefore missed out? Clearly there is potential for conflict of interest when cost as well as fund quality is a deciding factor.
It’s also worth underlining that while short buylists are a good starting-point for investors who want clear guidance, they should not be viewed as the be-all and end-all in fund selection for more engaged investors.
A browse of the 2019 Rated Funds list shows that in every category there are diverse strong candidates with quite different approaches and investment processes. Some will do well in bullish periods, whereas others outperform in more difficult environments; some are focused ‘best ideas’ portfolios, while others are deliberately highly diverse; some are familiar names, others much less so. It’s a great place to begin if you’re looking for a more exhaustive shortlist.