Recent weeks have seen the annual release of a number of different fund ratings and ‘dog lists’ designed to inform investors which funds are performing well and which are not. But how useful is this research to advisers?
Many lists promote the success and prospects of a number of funds across different sectors in order to award their seal of approval.
FE recently announced a number of funds had been awarded the top rating of five FE crowns in their first rating by the analysis firm, while Bestinvest revealed which poorly performing funds had made it onto its ‘Spot the Dog’ list.
Advisers are split on whether these lists should be adhered to in making recommendations to clients.
Thomas and Thomas Finance managing director Darren Lloyd Thomas says the growing number of fund-rating services is a good thing but warns against the way performance is measured.
“We do use fund rating services and put quite a lot of onus on them so clearly we think they can be useful,” he says. “The fact there is more competition out there with a growing number of these firms is good for advisers.
“You have to obviously do research yourself because some research only takes into account performance over three, five and 10 years, which would not take into account bad performance or a manager falling off a cliff in the past three months.”
Charles Stanley Direct head of investment research Ben Yearsley says the removal of commission post-RDR has improved the credibility of fund lists and argues “best in class” lists are more use to execution-only customers.
He says: “The use of ‘best buy’ lists is determined by an understanding of how they are put together. What is the list trying to do? Is it a ‘best in class’ or a ‘what to buy now’ list? Two very different propositions. Personally I favour the best in class list, as if you are providing an execution-only list, you do not know what asset classes the end investor actually wants.
“The RDR’s removal of commission has obviously been helpful in removing any hint of commercial bias in lists.”
But investment consultancy Gbi2 managing director Graham Bentley says many lists are backwards-facing and skewed because the research is centred around which funds have performed well in the past.
“The starting point of many research firms is to see which funds have been doing well over three to five years then meet the managers of those funds,” says Bentley. “This means research is skewed towards select funds on the basis of past performance rather than other factors.”
Bentley adds some advisers may not necessarily remove the funds from their recommended selections when they fall off lists provided by research firms.
“You have to ask whether advisers’ use of funds mirrors the ratings of the agency,” he says. “Do advisers remove a fund from their recommended list when they are downgraded or removed by a ratings agency? I suspect there are a number who do not. Advisers should be carrying out due diligence on the ratings services they use as well as their funds and platforms.”
The Lang Cat principal Mark Polson says firms that provide fund rating services should make their criteria for fund selection clear.
He says: “If fund ratings didn’t exist, someone would have to invent them. With such a universe to pick from, ratings as a shorthand is worthwhile. But advisers need to know what makes a five-star or crown fund and be able to articulate that to clients. Firms which provide rating services should be transparent about how and what they do – which some of them need to work on.”
Hargreaves Lansdown has senior analyst Laith Khalaf says: “Many advisers are not fund pickers so help can come in the form of third-party research or can be provided by the firm they work for.”