DIY investors should pay close attention to the picks featured on favourite fund lists, as not all of them will be the star performers they appear to be.
In the worst-case scenario, investors have a nearly one-in-three chance of picking a poorly performing fund, which could continue to make sub-par returns, research shows.
‘Investors think funds on the lists are recommendations and will deliver the best prospects.
Gamble: In the worst-case scenario, investors have a nearly one-in-three chance of picking a poorly performing fund, which could continue to make sub-par returns, research shows
But there is no guarantee they will perform better than funds which aren’t on the list,’ says Patrick Connolly, a chartered financial planner at Chase de Vere.
The investment tip lists have faced scrutiny after investment platform Hargreaves Lansdown backed Neil Woodford’s doomed fund on its Wealth 50 list.
The five largest platforms for DIY investors are Hargreaves Lansdown (HL), Interactive Investor, Fidelity, Halifax and Barclays, according to analyst Platforum.
Money Mail asked Chase de Vere to analyse returns from funds on its recommended lists and compare them to the average for each fund’s peer group.
Barclays Fund List had the worst hit rate, possibly because its selection is so narrow. Out of 35 funds, ten had below-average returns.
The list also includes four funds — Invesco European Equity, Janus Henderson Global Equity Income, JPM U.S. Equity Income and Man GLG Japan Core Alpha — featured in the Spot the Dog survey from Bestinvest, another platform. This flags up funds that have lagged on a three-year basis.
A quarter of the funds in the Hargreaves Lansdown Wealth 50, and almost a fifth on the Halifax Select list, have below-average returns, says Chase.
HL has two of Bestinvest’s ‘dogs’ and Halifax one. Halifax’s list is the only one compiled by an independent researcher, Morningstar. The rest are created in-house.
Fidelity had nine sub-par funds out of 48 and two ‘dogs’, while Interactive Investor’s Super 60 had a cleaner sheet, with ten sub-par funds out of 60 and one ‘dog’.
Mr Connolly said that many under-performing funds had done so because they specifically invest in ‘value’ stocks, such as banks and retailers. These have been out of favour for a long time.
Value funds Man GLG Japan Core Alpha and Artemis Global Income have suffered consequently, as have tracker funds following the FTSE-100 index, which contains more value than currently popular ‘growth’ stocks.
Man GLG Japan features on four of the five lists, despite being a serial under-performer.
About its laggards, Barclays says: ‘Past performance is no guide to future returns. We think that these remain well-managed funds that will show better performance when market conditions are more conducive to their investment approach.’
At Hargreaves Lansdown, head of investment analysis Emma Wall agrees. She says: ‘We address performance for the funds on the list in our regular research notes’.
However, at least for the Man GLG Japan fund, the accompanying online HL commentary states only that there is a ‘risk’ of underperformance.
Past returns are shown compared to the benchmark index, not the peer group.
Another case is the Jupiter Absolute Return which has lost money over the past five years.
Nonetheless, this fund sits on the Fidelity Select 50. Investment director Tom Stevenson was unable to confirm if it was under review, but says ‘all of our funds are under review all of the time’.
He added that he would be concerned if the list was full of top-performing funds, as this would indicate they were concentrated in an area which may have peaked and be likely to decline.
Halifax says: ‘Morningstar monitors how the funds are doing each quarter and may make suggestions to us for changes.’
Meanwhile, Interactive Investor says its year-old Super 60 list is screened monthly, but it is keen to increase transparency.
Dzmitry Lipski, head of its funds research, says investors are informed ‘when questions arise’ via the Fund Spotlight updates, while tags on each fund suggest how it should be used in a portfolio.
Consistent poor performance can be a warning sign that a fund is in trouble. An illustration is the suite of Woodford funds, some of which ended up in suspension.
While all the platforms detail their reasons online for removing a fund, they seem coy about flagging long-term under-performance.
All the platforms state that they receive no benefit from putting funds on their lists.
To ascertain whether a fund is best in class or a dunce, investors could also check independent resources such as newspapers or investment blogs, Mr Connolly says.
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