In the last 10 days Jeff Prestridge from the Mail on Sunday got in touch asking some detailed questions as he was setting out to review the methods of various advisers and investment platforms. The trigger was an upcoming overhaul by Hargreaves Lansdown of their HL150 – the revelations of which are already exciting (annoying?) quite a few of you, and understandably.
Jeff was kind enough to give us the highest rating in his review. Here are his questions, and our responses (slightly edited for clarity). At the end you can also see a link to his piece.
1. What prompted you to launch the ratings?
There was a desperate need for an understandable and objective basis for selecting funds which provided consistently better results, and in a scale which made a difference for investors.
2. Is there a USP to your fund ratings by sector?
The stage before selecting funds is to decide on asset allocation. Once an investor has made that call they need to choose funds, and to a large extent the fund sectors reflect those different asset categories.
For example, if someone wants 50% allocated to the UK they would invest 50% into the top-rated funds in UK All Companies sector (usually we recommend the top 3 funds).
3. How often are the fund ratings updated?
Every month, every fund, every sector.
4. Since launch, how many fund ratings have been withdrawn and how many granted? To put this into context, how many fund ratings have you issued in total?
Every month we update ratings for approximately 3,500 funds across 35 sectors, and we have been doing that for 6 years on FundExpert. We usually recommend selecting the top 3 funds in a sector, possibly less but not more.
At the moment there are 680 5-star funds, though this is not an issue for users - they just need to identify the top 1-3 funds in their target sectors, and repeat this once every 6 months at their review point.
We prompt that review automatically every 6 months, part of our service to keep Gold Members engaged with their investments at key points.
I couldn't say how many 5-star ratings have been issued in total.
5. Are fund ratings a useful tool? To be used in splendid isolation?
For the part of your investment process where you need to select funds these ratings are a total solution. One reason why so many people get mediocre returns (at best) is because they over-think - and, ironically, the more expert they believe they are the more they over-think - lots of effort for results that are mediocre at best.
Another reason for mediocrity is because far too many investors are too trusting in believing what they are told - despite lack of any hard evidence to support that trust.
The prior parts in the investment process are deciding on your objective (growth/income) - decide on your attitude to risk - decide on your asset allocation.
After selecting funds, the subsequent parts are - when to review funds - how to review funds - and when to sell between review points e.g. apply a stop-loss.
So yes, the fund ratings are a total solution - but only at that one point within the larger investment process. A service worthy of the name demands that investors are guided through each part of the whole process.
6. Is there a danger a fund rating gives a fund an air of invincibility?
No. In fact we work very hard to highlight risks generally as well as specifically.
For example, we analysed the detail on "what can go wrong?" in
my book, chapter 18
Partly, I wrote this because there are so many so-called experts in our industry who will have something to say about our methodology (and Momentum investing generally) but have never done any detailed research and number crunching in their lives, and never been at the sharp end providing personalised advice.
Plus, we STRONGLY advocate the use of stop-losses, and throughout the last two years have continually cautioned investors (advised and non-advised) to raise cash weightings - all of which is also debated monthly in live teleconferences with our Gold Members.
7. I know you now charge for information on fund ratings (Gold Members). Why did you take this move and how much do you charge? Are investors comfortable paying for the ratings?
Funnily enough pre-paywall a number of users of FundExpert said to us "I would happily pay for your ratings and research, if you could provide a little bit more...".
So we did add more. We improved the tools for analysis and fund selection, we added model portfolios, we added stop-loss alerts, we added monthly live teleconferences, plus market level analysis which doesn't pull punches - and there is much much more to come.
The charge is £29.20 per month, and the first month is just £1, plus a money-back guarantee after 12 months - if they aren't happy for whatever reason we give them back their subscription - it's a no brainer to give it a try.
They don't need to have much invested to pay for the monthly cost via extra performance e.g. this from the book "Clueless"...
"The Dynamic Fund Rating system has produced some staggering results. Here is a breakdown of more recent results to July 2016 for the UK All Companies sector, analysing 204 five-year periods since 1994. The results are impressive.
- 7.85% EXTRA growth per annum achieved by the Dynamic Fund Ratings vs the average fund in the sector
- £45,920 EXTRA return, on average, after 5 years from £100,000 initial investment
- 92.16% likelihood of outperformance - Dynamic Fund Selection outperformed in 188/204 five year periods
We are not aware of any other fund rating system that can demonstrate added value on this scale. Plus we make the complete evidence publicly available on the FundExpert website, fund sector by fund sector."
8. Why do you think your ratings are better than anyone else’s?
The fund rating services which I had encountered since the 1980s were lacking, to say the least. So, if we at FundExpert were going to come up with a successful method for rating funds, I was conscious that this process MUST have these criteria:
- Straightforward to identify top-rated funds.
- The underlying process must be objective, clear and understandable.
- It must be easily repeatable.
- There must be a volume of long term evidence of it generating extra growth.
These are straightforward criteria for a fund rating system worthy of the name. There is no seat of pants - it is objective. No fund recommendation by proclamation "because I'm an expert". No loud fund recommendation whose only foundation is that I have the biggest marketing budget.
I don't know if what we do is better than anyone else's - but I do know that I haven't found anyone else who can meet the above criteria. And I tell all FundExpert users to challenge their advisers or sources of research with the above requirements.
That’s it. Jeff’s article is
HERE – well worth a read.
Because of the Hargreaves Lansdown news of recent days, this is a very big issue in the days and weeks ahead and we will certainly have more to say – particularly in the next teleconference for Gold Members. Do feed back and ask away – I expect a growing inbox!