Can you explain your approach to investment management?
Our particular expertise lies in fund selection. That has always been at the heart of what we do. It comes through in a variety of guises: our Wealth 150 list of favoured funds, the model portfolios our advisers use, our multi-manager funds and the discretionary management service.
Picking funds delivers a lot of value for clients. Whether it is true that the average fund underperforms the index is subject to debate but we are trying to lift the bar by picking funds that are not average and that deliver better returns to clients. There are two parts to this: quantitative and qualitative analysis.
Quantitative analysis is number crunching. We have an in-house database and analysis tools we have built up over time.
Qualitative research involves meeting fund managers and discussing funds within the group.
The main thrust is to determine whether active fund management is delivering outperformance as a result of luck or skill; we are interested in the latter. We take a very long-term view of at least seven years, so we can see how the manager has performed in different market environments.
Why do you select funds in-house?
Because it is a core part of what we do. In-house is par for the course in Hargreaves Lansdown, whether it is investing through our platform or compliance. It gives us greater control over fund selection because we are not reliant on third parties to deliver it to us.
Hargreaves: Company Factfile
Date company established: 1981
Assets under management: £79.2bn
Number of staff: 1,043
Number of clients: 954,000
Platform used: In-house platform
DFM used: In-house service
How do you go about researching and selecting funds?
Our starting point is the aforementioned track record. Then we slice and dice the portfolio, looking for factors of luck or skill. For example, we might look at how much is invested in large, medium or small companies, then try to figure out what the manager’s contribution is to that part of the investment style.
If there is a high allocation to medium-sized companies and that has been driving the outperformance, we are less interested in that. We are more interested in the stock selection.
We do not want someone who has just invested in a market that is doing well and has been lucky in picking medium-sized companies that have outperformed.
We look at how a stock has done compared with other companies in that part of the portfolio and in the sector as well.
For example, if there is exposure to consumer goods and they do well, we want to see how the manager adds value in portfolio construction and stock selection.
How long a fund manager has been at the helm or involved in the fund is also important. Where you get co-managers and one leaves, you have to assess what contribution that person has made.
What’s your approach to monitoring and making changes to your portfolios and favoured funds list?
Funds are monitored all the time because changes are happening to them all the time. A manager moving on is the main cause of funds being removed.
I would not say replaced, as it is not a case of one in, one out; funds are added and removed independently.
When a manager moves on, we look at who will be taking over and whether we will continue to use that fund.
Meanwhile, some funds close to new investment as they have enough money and occasionally we remove funds because the performance has been disappointing.
Hargreaves Lansdown has its own platform, Vantage, and an in-house discretionary management service. Where do they fit in?
Our platform is a D2C service offering a range of tax shelters such as Sipps, Isas, and Junior Isas. Our discretionary management and adviser services leverage off that; they use the platform to execute the decisions made within the discretionary and model portfolios.
How does your in-house approach to investment management, including the platform and discretionary management service, benefit clients and the business?
It allows us to retain clients. If you outsource administration, for example, you are a step removed from your clients but we are constantly in touch with them. We can monitor what clients want and respond to changes in the way they deal with their investments. They stay with us and recommend us to their friends.
It also gives us a greater element of control in the quality of service we offer to clients and in upgrading the service we are going to deliver. For example, we have a mobile app that has been downloaded almost 500,000 times.
We control the platform and things like dealing but if we outsourced those, dealing with all the counterparties to provide the app would be difficult. We are investing in the latest technology for the platform and that makes it easier for clients to manage their investments.