A majority of people think they are more skilful than the average driver, but that can’t be true. That’s the often-used adage highlighting how most of us can’t be above average.
To this we can add that most fund managers think they will beat their typical rival.
The majority don’t, of course, and identifying the small number who have the ability to do this consistently is getting harder.
That’s one message that investors can take from Hargreaves Lansdown’s relaunched favourite funds list – newly slimmed down from a Wealth 150 to a Wealth 50.
Neil Woodford, left, kept his spot on Hargreaves Lansdown’s newly slimmed down Wealth 50 list of top funds, but Terry Smith, right, couldn’t get a place
Even allowing for the fact there’s actually 60 funds on it, this is still a big step for the DIY investing giant, which kicked off the top funds list trend back in 2003.
Hargreaves Lansdown’s customer base is so big, with almost £100billion invested, and its marketing machine so slick, that being on the list makes a meaningful difference to fund management firms.
Such a situation makes it easy to be cynical and label such selections as marketing guff, but I’d avoid dismissing them out of hand.
That’s because with about 3,000 on offer, it’s hard to pick an investment fund.
All will tell you that they are the best at what they do, waves of them get launched as investment fads take off, and managers can easily be flattered by performance figures that mainly reflect they were in the right place at the right time.
Even if you do things the right way round, working out your investment plan, appetite for risk, and assessing where you think the world is headed, and then try to find some funds to build a suitable portfolio, the array can be bewildering.
A list like Hargreaves Lansdown’s Wealth 50, Interactive Investor’s new Super 60, (which unlike HL also includes investment trusts) or any of the rival platforms’ choices, at least narrows the field down.
Funds on these lists aren’t the only ones worth investing in – and those compiling lists happily admit that – but invest in one and you are dramatically reducing your chances of picking a duffer.
Skill or luck? The Wealth 50 methodology aims to find out how a manager should have done based on their sector and selection style and then compare that to how the fund did
So, how do you pick a good fund?
The answer is that there is no definitive answer, as all the platforms do it differently. The crossover between the 60 investments each on the Hargreaves Lansdown and Interactive Investor selections is just six.
Funds on both lists
Both Hargreaves Lansdown and Interactive Investor launched top fund lists with 60 constituents this week.
Only six funds made both:
Lindsell Train UK Equity
Artemis Global Income
FP Crux European Special Situations
Jupiter Strategic Bond
M&G Global Macro Bond
iShares Pacific ex-Japan equity index
Hargreaves does a huge amount of analysis to deliver the Wealth 50, which is both quantitative (figures on how funds have done) and qualitative (assessing what managers say, do and invest in).
It claims this takes up 25,000 hours of research each year.
It follows managers not funds, insists on a long track record, and tries to separate out skill from luck. That’s done by assessing how the manager should have done based on the sector and type of companies they invest in, then comparing it to how they actually did.
It claims this method works, with its average Wealth 150 fund outperforming the benchmark index by 5.8 per cent and sector average by 11.8 per cent while on the list, which is typically for about five years.
That’s not bad, but it’s not a huge amount considering you would expect carefully selected best funds to beat the market.
Meanwhile, Hargreaves’ statistics show that out of 24 sectors, only half saw Wealth 150 funds beat the benchmark index (meaning you may as well have had a cheap tracker) although 17 beat the sector average.
Mixed bag: Hargreaves Lansdown says the average Wealth 150 fund outperforms while on the list, however, drilling down into sectors shows that only half beat their benchmark index
There’s also the question of whether this whole thing isn’t a bit cosy?
Hargreaves Lansdown creates a fund list, asks fund managers for a discount on charges, all of them on there offer money off, the funds go on the Wealth 50 and get lots of extra money flowing in from investors.
Investors are right to take what they are told with a pinch of salt and ask that question, but there is something worth noting on the matter that people may not realise.
Hargreaves Lansdown might be a highly efficient money-making machine but it also gets a great deal of scrutiny for this list.
At its relaunch this week, it took a comprehensive grilling from a room of experienced investment journalists, some of whom have an illustrious history of crossing swords with the firm.
Its chief executive Chris Hill, research director Mark Dampier and others from the team were happy to answer all the questions put to them and did so candidly and, as far as this journalist can tell, honestly.
We got answers on why Neil Woodford kept his spot, despite poor performance, and another investor’s darling Terry Smith didn’t get one despite good performance.
The former is a headache, admitted Mr Dampier, but he believes Woodford’s long track record of outperformance and experience weathering previous storms justifies staying on. ‘We are conviction investors’, Mr Dampier said.
In the latter case, Fundsmith misses out due to a shorter track record and similar performance but higher fees than Lindsell Train Global Equity. The two funds are similar, so Mr Dampier argued there was no need for both on the Wealth 50.
To many investors it seems these two fund managers are not being treated equally, but Hargreaves makes the case that Woodford’s long track record should allow him the benefit of the doubt for now.
The firm was also pushed on other questions:
Do fund managers have to agree to a discount to get on? No, but apparently Hargreaves has enough clout that none have resisted the call.
Why no investment trusts? Because the Wealth 50 has enough heft that large scale buying can push up share prices and premiums and make it hard for investors to buy in.
If Hargreaves Lansdown is pushing fund managers to cut their fees, why doesn’t it cut its own charges? It’s continually improving its service and that costs money – translation ‘don’t hold your breath, folks’.
I’m not sure I agree with all the answers, but to be fair they were given and the tough questions weren’t dodged.
Nonetheless, if you only look at the Wealth 50, you’ll miss out on investment trusts, newer funds, find Neil Woodford but not Terry Smith and be basing your choice on historic figures.
So, it’s not perfect.
Having looked at both of the new lists launched this week, I personally prefer Interactive Investor’s, which also features trusts, such as dividend hero City of London and global growth favourite Scottish Mortgage.
However, Interactive’s isn’t as clear as Hargreaves on methodology, so it’s not perfect either.
In fact, no selection ever will be – there will always turn out to be some duds. But the first step to investment success is getting started and if the thing holding you back is not knowing what to pick in a sea of names, then these lists are a decent place to begin.