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Investment Uncovered – The Big Debate: Are fund buy lists outdated?

In a new series, we ask industry experts if they think fund buy or sell lists are still suitable for investors

Dices cubes to trader.Fund buy lists have been a topic of debate for years, with many believing they are a help for investors (particularly the self-invested) while others think they are a hindrance and investors should do proper due diligence. Money Marketing asks whether fund buy lists are outdated.

Adrian Lowcock, head of personal investing at Willis Owen

These lists are used across the investment industry in several ways. Fund managers conduct analysis and screens to create shortlists of funds they like to buy, while discretionary wealth management companies use them to ensure their managers are in line with research teams’ views, in order to ensure they are consistent across their clients and branches.

They are used for model portfolios and by multi-asset fund managers predominantly, and are employed every day by experienced and qualified investors who can find them extremely useful.

The idea that they should be scrapped for individual investors makes little sense. These are, after all, investors who don’t have access to the same tools, data and detailed research as discretionary fund managers and other professional investors, especially given there are thousands of funds from which investors need to choose.

A buy list is there to help break this down and make it easier to choose from, and by and large most platforms provide this research as part of their service. While some may have commercialised their lists or got too close to a fund manager, the solution is to refine the rules and improve the service – not get rid of something that has helped so many.

Rick Eling, investment director at Quilter Financial Planning

An investor should ask three questions on seeing a buy list:
1 What is this list for?
2 How was it put together?
3 What am I supposed to do with the information?

Many lists depend heavily on past performance. I know of firms that publish such lists, often making headlines, based on just a rolling five-year record. There’s nothing wrong with that, but it easily leads investors or professional advisers to base decisions on historical data. If your only rationale for selecting fund X is that it’s had a good five years, you need to reconsider your approach to fund selection.

The same goes for lists based on sales volumes. Why should ‘best-selling fund this year’ prompt you to buy something? Isn’t the top rank just evidence that the investment in question is overbought?

I’ve always found it odd: in every other walk of life a smart consumer waits for things to fall to a cheaper price before they buy. But in investment many people seem to do the opposite in waiting for things to be expensive before they buy and treating a falling price as a sell signal.

In our recent research we found this error to be one of the key drivers of poor investment performance among unadvised investors. The temptation to buy something because it’s at the top of a list is understandable, but you need to fight it and look more deeply into what you’re buying and what its recent behaviour means.

Alex Barry, head of UK sales at Legg Mason

Buy lists are more relevant than ever and are becoming increasingly so. In much the same way that a holidaymaker visits Expedia to find the best holiday package, buy lists are useful filtration systems that are put together by qualified analysts.

Buy lists are used by a range of firms, from large institutions and private banks to independent advisers. They are useful for the end client as they help them make the right investment decision. In addition, buy lists are useful in the world of regulatory pressures, where they can benefit from consistent due diligence on the same range of products. The client also benefits from a reduction in costs as a result.

What is key is that alongside these buy lists is a well-constructed and diversified portfolio. Buy lists work for wealth management firms in that they help centralise the process, providing a consistent service to each client, whether in Newcastle or Newquay.

MP warns buy lists could mislead investors

Holly Mackay, founder of Boring Money

We have an investment advice gap of 9.2 million people. To glibly say that everyone should see an adviser is not practical from either a supply or a demand angle. Our latest research confirms that which investment or product to buy is the second most common query that people have, and 78 per cent of people report confidence levels of six or less out of 10 when picking investment funds.

People need more investment help, not less. And fund best buy lists are a core part of easing the stress created by the advice gap.

They are used by 70 per cent of DIY investors. However, trust in these lists has been dented and 45 per cent of DIY investors use them as a secondary sense check, not gospel.

They can obviously be improved. Independence is important, as is better communication about a fund’s objectives, risk and charges.

We need to improve how we use visuals and words to tell people about these products, making our primary driver clarity rather than backside covering.

The more the industry squabbles and plays one-upmanship over these lists, the more the potential new investor tarnishes us all with the same brush and stays in their current account for another year.

The lesson is about the need for universal improvement of these lists, which investors tell me play a critical role in helping them navigate a complex world.

Jason Holland, managing director at Tilney Investment Management Services

Pretty much all firms giving advice on investments, or managing investment portfolios, will have a buy list or panel of funds that have met their due diligence process. That shouldn’t be contentious.

What matters is how that panel is constructed, the quality and rigour of the research behind it and whether the process has integrity from an investment perspective. This is particularly relevant for execution-only platforms that publicise lists of ‘preferred’ or ‘rated’ funds to non-advised investors to help in their decision making – often ignoring whole product classes that may actually stack up as more competitive in particular areas.

In our view, as well as highlighting options we feel are high quality and worth considering, there is also a case for flagging those products that have serially under-delivered for investors, which we call ‘dog’ funds. Such lists are an important reminder that there are many funds that are simply poor value for money, and that, if an investor is going to make their own choices without professional advice, judicious selection is essential.

Shaun Port, chief investment officer, Nutmeg

As the FCA highlighted in its 2017 study, there are concerns around links between funds on best buy lists and platform providers. The suspension of the Woodford Equity Income fund has brought this sharply into focus, as retail investors with some of the country’s largest investment platforms are wondering when they’ll be able to access their money.

The fallout calls into question a number of issues for the industry, paramount among them: the appropriateness of the fund recommendations for a mass market retail audience; the frequency and transparency of the due diligence process for funds on best buy lists (especially given that questions around Woodford’s funds started some time ago); and, perhaps the most concerning for all involved in the investment industry, the far-reaching damage to consumer confidence in investing that a scandal could cause.

It’s time the regulator revisited best buy fund lists and whether they’re acting in the best interest of consumers – before those who’ve had their fingers burned are put off the industry forever.

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. These buy lists fall into two categories.
    1. Those issued by platforms. They shouldn’t be allowed at all. This is akin to giving advice.
    2. Those issued by authorised advisers. This is somewhat of a farce. Do they expect clients to pick from these lists? If so the ‘advice’ is somewhat lackadaisical. Why even call yourself an adviser if you are not prepared to stick your neck out and advise your clients individually for funds which you consider most appropriate for their circumstances?

  2. Harry. What is wrong with advisers guiding individuals who cannot afford/do not want to engage in full financial planning advice?

    Our industry needs to think “outside of the box” in order to help people engage with their finances. We certainly don’t need to look back at how things used to be.

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