Hargreaves Lansdown (HL) have updated their Wealth 50 fund list. The latest version is called the Wealth Shortlist and features 70 funds. As we have our own ratings systems with strong track records – Dynamic Fund Ratings and Vintage Fund Ratings – using objective criteria, we wanted to test the new list against an objective benchmark.
Firstly, we will take a quick look at what makes a good ratings system and then measure some of the funds in the renamed Wealth Shortlist using our Vintage Fund Ratings, to see how the funds stack up.
What goes into a rating system?
According to HL,
The Wealth Shortlist contains “funds that our in-depth analysis indicates have the greatest performance potential.”
They go on to highlight various areas they focus on, such as:
- The experience and resources of the manager
- Manager’s consistency of applying an investment process
- Fund manager’s culture, ESG factors and remuneration
- Performance: 5 years, ideally 10.
That all sounds plausible, but it is a bit fluffy, lacking detail on any objective underlying process, and whether there is any evidence that this approach is any good at identifying funds with a high likelihood of outstanding performance in the future.
Does the experience of a fund manager matter? We have not seen evidence that it does. Most funds’ investment processes are very sticky – when a manager moves on the management process stays the same.
Equally, following a “star fund manager” is normally not advisable. See the Woodford debacle of 2019 (more
here).
Does a fund manager’s approach to ESG tell you much about their performance, which is what matters to the end investor? We would say not.
Our view is that any best-buy list or fund rating system must be supported by a tight process. More precisely, these are the must-haves for an effective process to identify outstanding funds:
- 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, and these are met by our Dynamic Fund Ratings and Vintage Fund Ratings meet these criteria.
There is no seat of pants analysis - it is objective.
No fund recommendation by proclaiming "because I'm an expert".
No scope for our choices to be skewed by star fund managers or those with a good story.
First impressions
As we are using our Vintage Fund Ratings as the measure in this note, it is important that you know what makes them tick.
To achieve a Vintage rating a fund must be in the top 40% of performers in 60% of the time. The “time” is the 120 overlapping 6 monthly periods in the last 10 years with a higher weighting being given to more recent periods.
We did not think this was a demanding benchmark. But 92% of funds failed to beat it in our original research.
Applying this benchmark to the Wealth Shortlist:
- Only 5 are Vintage-rated funds (just 7% of this best-buy list). That is worse than the last review when 14% of the funds in the HL50 list were rated Vintage.
- And the average Vintage rating was only 43% (nearly a third below the Vintage benchmark.) *
Remember, to get a Vintage rating a fund needs a score of 60% or more.
Now let’s look at the Wealth Shortlist funds in a two popular sectors – UK All Companies and Global.
UK All Companies
These are the Wealth Shortlist funds in the UK All Companies sector, along with our Vintage ratings.
A few things that stand out:
- The only Vintage rated fund from last time – Lindsell Train UK Equity – is no longer in the list.
- Another notable departure is Neil Woodford’s failed old fund.
- However, there is another tracker that has been added – L&G UK 100 Index...
- …but neither index tracker has succeeded in beating its index over the last 10-year period.
Wealth Shortlist funds
UK All Companies
|
Fund
|
Vintage Score
|
|
Liontrust UK Growth
|
57.9
|
|
Unicorn Outstanding British Companies
|
52.0
|
|
Fidelity Special Situations
|
40.9
|
|
AXA WF Framlington UK(1)
|
39.4
|
|
LF Majedie UK Equity
|
32.0
|
|
L&G UK 100 Index
|
30.9
|
|
L&G UK Index
|
25.2
|
Some funds, such as Liontrust, are bordering on Vintage but our process is objective. So on the basis of our research we would not give a "buy" signal for any of these funds.
In our analysis, there are 22 Vintage rated funds in the UK All Companies sector, none of which appear in the HL list.
Does Vintage add value?
Using Vintage Ratings to build a portfolio gives some great results. If you selected funds using Vintage from July 2004, your portfolio would have returned 312%.
Nearly twice the sector average (161%).
That’s 151% more growth - chunky extra returns.
Global
It is a similar picture if we look at the Global sector.
These are the Wealth Shortlist funds in the Global sector, along with our Vintage ratings. Rathbone Global Opps. is the only Vintage rated fund in the list, with a cracking long-term record.
Global
|
Fund
|
Vintage Score
|
|
Rathbone Global Opps
|
60.1
|
|
ASI Global Smaller Companies
|
54.0
|
|
Fidelity Global Dividend
|
54.0
|
|
Artemis Global Income
|
44.9
|
|
Fidelity Index World
|
44.0
|
|
L&G International Index
|
43.4
|
|
Jupiter Global Value Equity
|
38.1
|
|
Troy Trojan Global Income
|
24.0
|
In our analysis, there are 22 Vintage rated funds in the Global sector.
If you had started selecting Global funds using Vintage in July 2004, your portfolio would have returned 380%.
The Global sector average was 261%. That is 119% extra growth.
Substantial. Having an objective rating system works.
Remember, any process to rate funds 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. Both our Dynamic Fund Ratings and Vintage Fund Ratings meet these criteria.
There is no seat of pants - it is objective.
Important in the age of cynicism.
No fund recommendation by proclamation "because I'm an expert".
No recommendation based on how many times I have sat in front of a (very smart) fund manager who knows how to impress me.
Do keep an eye out for the July edition of the Vintage Funds report, which will be released in the coming weeks.
FURTHER READING
* There are 9 funds on the HL list that don’t have a Vintage rating. This is because they are from small or new sectors that don’t have enough data to make comparisons relevant e.g. US Smaller Companies.