28 Jan 2019 What has Hargreaves Lansdown ever done for us? eh?
Well, this month it gave us the Wealth 50 — a slimmed down version of its old Wealth 150 list, which has been a key fund choice influencer since 2003. But given the amount of grief and badmouthing it’s attracted from Terry Smith et al, you would be forgiven for thinking that Hargreaves Lansdown was nothing but a brash parvenu muscling on the platform game instead of an experienced platform provider with 30+ years in the industry. But is any of the criticism justified? let’s find out.
The Wealth 50 is a marketing tool and Hargreaves Lansdown certainly ‘knows its customers’. The original Hargreaves fund guides were paper affairs, with short descriptions of the best picks, and for those that looked at the back where everything was listed, the best buys had a star by them.
I used to wait for my copy and I’m sure a lot of advisers did too. The list has translated less well to the internet where filters and buttons have become the norm. Now that more business is being done on phone apps, big lists just don’t work anymore and given our capacity to hold information to make decisions is 5+/-2 (what psychologists call ‘Millers Law’) 50 is too much really. Merging and slimming down the 150 and 150+ lists was a good idea overall. And maybe they could have gone further, but it was definitely a step in the right direction.
Who’s hot or not?
The list has generated a lot of comment as some funds with weak performance have been allowed to stay on — notably Neil Woodford’s Equity Income, M&G Recovery and Invesco Tactical Bond funds. But far more controversial was the exclusion of the Fundsmith Equity fund despite its sector-leading 69% three-year performance. This led to accusations that Hargreaves made its selections based on fund discounts, which Terry Smith refuses to give.
I’m not convinced that Hargreaves has been shallow over the list as some have made out. Hargreaves, like many other distributors will have asked Terry for a deal, but when a fund is popular it doesn’t need to chase flows by seeking best-mates deals. And if it gives in to one distributor. the have-nots pester to join the group or won’t play any more if they can’t (the fund industry can be so childish at times…).
Whatever else is said, Hargreaves has been consistent. Fundsmith Equity has never been on a Hargreaves recommended list, so it wasn’t ‘dropped from the squad’ as happened to the Fidelity Special Situations fund. The original 2003 Wealth 150 list was based on performance, but over the last few years ‘value’ has been mentioned more prominently, and even more so since the platform study paper. Value here means overall fund cost where it diminishes fund performance.
We examined the cost-adjusted returns for the Fundsmith Equity fund and one of its peers, the Lindsell Train Global Equity fund. Hargreaves Lansdown customers would have been better off on one, three and five-year returns with the Lindsell Train Global Equity (D). The Lindsell fund shows lower, more consistent volatility and higher Sharpe Ratio. If you were to use another lower-cost platform and the Lindsell discounted share class ‘D’ was not available, the situation may be different. To test our theory we looked at the cost of Fundsmith Equity and Lindsell Train Global equity funds on AJBell’s Youinvest D2C platform and got the same results.
|Fundsmith Equity||Lindsell Train Global Equity|
|Source: AJBell Youinvest|
In terms of performance, Lindsell Train is on a par with Fundsmith Equity for five-year returns and outperforms over three years and the year to date. The impact of cost on the overall return can obviously make a difference. We decided to compare the fees of the two funds on two platforms to see whether that would make a difference to overall returns.
|Platform||FS OCF for £1,000||LT OCF for|
|Hargreaves Lansdown*||95bps or £9.50||52bps or £5.20||45bps or £4.50||97bps or £9.70||140bps or £14.00|
|AJB Youinvest*||95bps or £9.50||69bps or £6.90||25bps or £2.50||94bps or £9.40||120bps or £12.00|
In summary, the Lindsell Train Global Equity fund is cheaper on both platforms — and given Hargreaves’s purchasing power — there is only a 3bps difference in price between the Lindesell Train fund on both platforms. As ever investors, need to look at the overall cost.
Looking at the Woodford fund, Hargreaves has been a long-term supporter of Neil as a fund manager going back to Invesco Perpetual days. It includes a detailed explanation in its ‘Waiting with Woodford’ article as to why Equity Income stays in, admitting the fund has performed poorly but identifying that it does well throughout the economic cycle. Hargreaves markets the outperformance of their Wealth 50 list by sector and will therefore be ruthless with any underperforming fund, even Woodford’s.
High platform charge
Some of the blowback about the Fundsmith Equity fund concerned the non-discounted 0.95% fund charge, which drew comment about Hargreaves’s platform charge which is high and hasn’t come down despite the platform’s large size (£94bn in Q318). CEO, Chris Hill, hit back with a comment about advisers’ premium pricing compared to the all-in cost of Hargreaves and said that it had used its negotiating might to bring down the cost of investing — as we saw above — but it was probably unwise to attack advisers since Hargreaves has its own advice arm.
The fact is that its direct-to-consumer service is a premium service and that is nothing to be ashamed about. Like Marks and Spencer and Waitrose customers, its customers happily pay for quality and reliability. I’d be interested to know how many people in financial services happen to have accounts with them? My guess would be quite a few, in addition to industry people who make the customary party remark to those that can’t afford full advice ‘Why don’t you have a look at Hargreaves Lansdown?… it’s very helpful and easy to use’.
A lot of us start with Hargreaves, but we find it too much bother to change to something cheaper. Nor does Hargreaves upset us with poor service or a poorly designed website that would make us leave in a fit of pique. Having said that, it will probably need to change its platform pricing in the next two or three years if regulatory pressure continues to build.
This puts it in a corporate trap because sell-side analysts like to compare it to the highly profitable St James’s Place. Hargreaves will resist and lobby, take a scalpel to fund managers (as they have done since RDR) and minimise back-office and technology costs. Strategically they will move into new high-profit areas. In short, it will adapt and its naysayers will continue to scratch their heads and wonder way Hargreaves stays ahead of its peers.
Cash is king
Interestingly, almost nobody commented on the Hargreaves revelation that it is pushing further into savings accounts with the launch next month of an easy-access savings account.
The banks have long been the next target for Hargreaves and it’s likely to take advantage of open-banking APIs to push its services through and bypass the banks and building societies that currently pay 0.25% commission to be featured on the platform. Unlike running a platform, the costs in banking are much lower and there are multiple opportunities to clip the ticket as money flows in and out.
So apart from democratising investment, offering online investing, fund lists, ‘H’ shareclasses, good customer service and the aqueduct, what exactly has Hargreaves done for us???…