The Evidence-Based Investor

Industry “research” is nothing like the real thing

Posted by Robin Powell on August 25, 2017

The Financial Conduct Authority, the UK regulator, is concerned about so-called “best-buy” fund lists, and rightly so.

Research on this subject by the FCA and other organisations has consistently pointed to a litany of shortcomings. In a nutshell, most “best-buy” or “star-rated” funds fail to beat the market. A very recent study showed that platforms that publish them are biased towards their “own brand” funds.

Last month, and not before time, the Authority announced a market study into investment platforms and whether they help or hinder investors in making sensible decisions and achieving successful outcomes.

Hargreaves Lansdown, Britain’s biggest fund supermarket, is starting its lobbying early, with the publication this week of an unsurprisingly upbeat assessment of its Wealth 150 list. (I say Wealth 150; there are now just 90 on it because, apparently, of the dwindling number of funds considered worthy of conclusion).

Hargreaves claims — and the trade press has, by and large, dutifully reported — that, since the Wealth 150 was first created in 2003, its recommendations have returned 6.5% more than their benchmarks and 13.5% more than comparable index-tracking funds.

I respectfully suggest, dear reader, that you take such claims with a pinch — in fact, make that a shovel-full — of salt.

Frankly I despair of “studies” like this. The evidence underpinning evidence-based investing is academic. It’s been produced with all the rigour that the academic process demands. It’s independent and, because it’s published in respected journals, it’s peer-reviewed. In many cases it has earned its authors the Nobel Prize in Economics.

This Hargreaves study, by comparison, doesn’t even warrant the term research.

The first-rate Wall Street Journal columnist Jason Zweig has had studies like this land on his desk for decades. Most, I suspect, go straight in the bin.

The other day Zweig wrote this:

“Asset managers have more ways to manipulate returns for marketing purposes than most clients can even imagine.. No matter how cynical you are, you aren’t cynical enough.”

Now I’m not a cynical person myself, but on the subject of industry-generated fund research I’m afraid I am. Remember, Hargreaves Lansdown has done spectacularly well from recommending and selling actively managed funds, then hosting them on its platform. According to Forbes, Peter Hargreaves is worth an estimated £2.25 billion (yes, billion), his co-founder Stephen Lansdown a comparatively measly £1.5 billion. The company has a frankly staggering profit margin of more than 70%, and you can hardly blame it for not wanting to give that up.

I have neither the time nor the inclination to work out how Hargreaves Lansdown has produced these latest figures, but Professor David Blake from Cass Business School tells me that misleading fund performance data usually involves an element of selection bias or survivorship bias, and sometimes both.

So, for example, today’s Wealth 150 looks nothing like the original list. Has Hargreaves included in its calculations all those funds that it’s quietly removed from the list over the last 14 years because they performed so poorly? I’m talking about funds like Anthony Bolton’s expensively-priced Fidelity China Special Situations Fund, which lost more than a third of its value in 2011. Another fund which dropped out of the list after plummeting in value was Mark Lyttleton’s BlackRock UK Absolute Alpha Fund; Lyttleton was jailed last December after admitting two counts of insider trading.

Who knows? The next manager to be axed from the list might even be Neil Woodford, the most famous Hargreaves poster boy of all. As with Bolton and Lyttleton, Hargreaves clients were bombarded with marketing about Woodford’s track record before the launch of his latest two funds. After his dismal performance over the last 12 months, even some of Woodford’s most loyal followers might well regret succumbing to the hype.

I don’t actually blame the marketing people at firms like Hargreaves Lansdown; they’re only doing their job. But why aren’t there more journalists asking more searching questions? Why are they simply taking it as read that data like this is entirely truthful and accurate and that it tells the whole story? Where are the British Jason Zweigs, fighting the consumer’s corner and holding this hopelessly conflicted industry to account?

Incidentally, you only have until 8th September to submit your views on recommended fund lists to the FCA’s platforms market study.

You can email: Investmentplatformsmarketstudy@fca.org.uk or write to Kate Blatchford, Competition & Economics Division, Financial Conduct Authority, 25 The North Colonnade, London E14 5HS.

Either way, please do it. And in the meantime, disregard best-buy fund lists. The low-cost index funds you really need are rarely on them anyway.

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Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector. Regis Media.

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