A few years ago, regulators decided that professional investors needed protecting from the 'sharks of the City' and their potentially biased share tips, writes Richard Evans in The Daily Telegraph. They forced institutions to build 'Chinese walls' between research departments and brokers who sell equities, to prevent researchers being influenced to write favourable notes on companies doing business with their colleagues.
So, asks Evans, why are there not similar restrictions on firms who both sell funds to private investors and provide research on them?
Sure, unit trusts aren't listed on the stock exchange and the research notes don't include an explicit buy, sell or hold' recommendation. But this is "splitting hairs", says Evans. If you put a fund on a list with a name such as Hargreaves Lansdown's "Wealth 150", or Bestinvest's "Premier Selection", any customer will read it as a buy rating.
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For its part, Hargreaves Lansdown says it conducts "rigorous mathematical analysis" along with "thousands of hours of interviews" with fund managers, basing selection for Wealth 150 on "prospective total return performance", writes Nic Cicutti in Money Marketing.
Investment skill is prioritised over fund price, and over time, fund charges eat into total returns, so it's good that discounts are pushed for. But Cicutti is uncomfortable that Hargreaves' explanation "leaves open the possibility" that funds are more likely to be included if their managers offer a discount.
In response, however, Mark Dampier, Hargreaves' head of research and architect of the Wealth 150, defends the selection process. "I resent suggestions, direct or implied, that [it] is chosen on a commercial basis," he replies in Money Marketing. Dampier says the FCA "regularly" interviews fund platforms about their preferred lists.
What's our take? It's a bit of a storm in a teacup. There's nothing wrong with using these lists to generate investment ideas. But you'd no more rely on them solely in your decision-making process than you would your mate down the pub, or a tip in a newspaper.
Do your own research before buying any fund. Why are you buying it? Is it the best way to access a particular sector or market? Or is there a passive option that will give you the same exposure more cheaply? And once you've decided on a particular fund, you need to ask can your platform provider give it to you at the keenest price?
These are the questions you should really be asking. Fretting about the provenance of what amounts to marketing fluff from your platform is not the best use of your time.
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