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How are firms choosing their passive buy lists?

Major firms have shed light on how they pick passive funds in their buy lists as the industry fights over how many and which to hold.

In a recent study, the FCA expressed concerns that providers’ lists of favourite funds did not include enough passives.

Platforms and wealth managers such as Tilney Group and AJ Bell offer a larger number of passive funds in their best buy lists compared to other firms such as Hargreaves Lansdown and Fidelity.

The most recent edition of the Bestinvest – which is part of Tilney – top-rated funds publication includes 18 tracker funds across major sectors. This includes six funds from Vanguard, five from HSBC, four from Fidelity and three from Legal & General.

Tilney Group managing director Jason Hollands says the key criteria when selecting “traditional passives” is to identify products expected to have very little tracking error.

The firm selects funds through a combination of low costs and physical replication of the underlying assets in an index.

On costs, Tilney seeks to use its “significant scale” to get access to the lowest cost share classes.

AJ Bell has 16 preferred passive funds, one per sector, including 10 iShares funds with fees ranging from 0.07 per cent to 0.4 per cent and four Vanguard funds with fees ranging from 0.09 per cent to 0.19 per cent.

The platform selects listed funds that are Ucits compliant, priced in pounds, and have at least £75m in assets. They must also be one of the three cheapest options on an ongoing charges basis.

Style over size

However, not all platforms include the largest passive providers in the market such as Vanguard in their lists.

Despite offering a wide range of passive funds and providers across its platform, Hargreaves lists only 13 in its Wealth 150 list. The firm offers a large number of Vanguard funds across the platform, but on its favourites list it only includes funds from L&G, BlackRock and HSBC.

Senior analyst Laith Khalaf says those firms have “cheaper deals” than equivalent Vanguard funds.

The L&G UK Index, which is included in the list, has ongoing charges of 0.10 per cent which are discounted to 0.04 per cent on the platform. Within the same sector, the UK All Companies, the Vanguard FTSE UK All Share index charges 0.08 per cent with no discount from the firm.

Cost conerns

Wychwood Financial Services director Rob Wood argues costs should not be the only measure of fund selection in providers’ lists.

He says: “Hargreaves include L&G, HSBC and Blackrock on their Wealth 150 list all of which have negotiated discounted terms with Hargreaves.

“Vanguard, probably the biggest and best passive provider in world, does not appear to do deals with platforms and does not appear on the Wealth 150 list. It makes you question the motives for the selections, after all cost is not the only consideration when looking at passive products.

“A few basis points savings on passive products is insignificant when you consider you can save 20 basis points plus by using a different platform.”

Fidelity International says there are “no specific criteria” funds need to meet to make the Select 50 list within its Fidelity Personal Investing direct platform.

It only holds BlackRock Global Property Securities Equity Tracker fund on its Select 50 list.

A Fidelity spokesman says: “We believe that the Select 50 should include strategies from across different asset classes which we believe can add value for investors.

“Developed market property shares fulfill this criteria with positive long term expected returns with an element of inflation linkage and diversification benefits versus other equity sectors. This does not, of course, mean that they are appropriate for every investor.”

Fidelity says the choice of a passive fund reflects the small number of property managers to choose from and of these, many have relatively short track records.

FundsNetwork, the company’s advised platform, does not offer a buy list.



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