Our Vintage Ratings vs AJ Bell, How Do They Stack Up?

In November 2021 AJ Bell published a list of top quartile funds within their sector over one, three, five and ten year periods.

You may have noticed that Gold Member Graham asked a question in last week’s Q&A about this fund list, and how they compare to our Vintage Ratings.

We know from speaking to many of you that you do cast an eye on other investment websites and their ratings, so we completely understand the value in comparing our research to what other people are saying.

What is important to note from the start is that this isn’t a shortlist of AJ Bell recommendations, they are simply publishing an alphabetical selection of funds which are top quartile performers over the various time periods mentioned above.

What Are Vintage Funds?

As a reminder of how our Vintage Ratings work, below are our bandings.

Vintage = a score greater than 60%

Mediocre = a score between 40% and 59.9%

Ugly = a score below 40%

A Vintage-rated fund is one which is in the top 40% of funds, at least 60% of the time. In plain English, that means a fund needs to be a bit better than average, a bit more than half of the time.  That is hardly a challenging benchmark – but 94% of funds fail!

How The AJ Bell List Stands Up To Scrutiny

Of the 28 funds on the AJ Bell shortlist, 16 are Vintage Rated, but 12 are no better than Mediocre (thankfully none received an Ugly rating!).  This is not great, but compared to ‘shortlists’ or ‘buy lists’ that other platforms and/or investment research houses publish, AJ Bell’s is not terrible.

The main reason for this is that AJ Bell aren’t picking a shortlist based on subjective data, unlike most other lists or rating systems you will see online.

But when objective data is considered for many rating systems, we deem most of it irrelevant.  These can include ongoing charges or the length of the fund manager’s tenure. One online platform self-proclaim that they like “managers who consistently apply their strict processes through different market conditions”. Would you rather a shortlist of funds that consistently outperform their sector peers, or a list of funds whose managers “stick to their processes”, processes which aren’t quantifiable or identifiable in any meaningful way? Hmmm…

Below Table 1 we look at what makes a top-class method for rating funds, and also why the AJ Bell method is fundamentally incomplete – like a one-legged chair.

Table 1: AJ Bell Funds Rated

What Makes A Good Fund Rating System?

We believe any successful fund rating system MUST hit these four criteria:

• Straightforward to identify top-rated funds
• The underlying process must be clear and understandable
• It must be repeatable
• There must be long term evidence that it generates extra growth

We believe we achieve all four of those must-haves fairly comfortably.

As you will see from our Vintage Bands above, identifying a Vintage Rated fund is simple.

Our process for identifying scoring funds is clear, and is outlined on page 7 of our Vintage Funds Report 2021.

It is repeatable as not only do we publish an update every summer, we also identify just how consistently the Vintage Ratings work in various sectors, year after year.

We do also identify in which sectors the Vintage Ratings don’t work quite as well, UK Equity Income for example.

Nothing Is Fool Proof

“Outperforming year in, year out is no easy feat, so we’re confident that the funds populating the tables can be considered the best of the best within their respective sectors” AJ Bell say. This sweeping statement does have an element of truth in it, as investing only in the funds that consistently outperform their peers is a great starting point. However, DIY investors must be prepared to review this list, at least once a year, and not get emotionally attached to funds that they decide to invest in.

Just because a fund is Vintage Rated in 2022, it doesn’t mean it will retain this tag in the subsequent years, hence the absolute requirement for regular reviews.

What Does This AJ Bell List Tell Us About When To Review Funds, Or Perhaps Future Growth?

Well, very little.

Where FundExpert differs from AJ Bell and other similar platforms is that they fail to mention:

• the probability of outperformance going forward if you did buy into one of these funds
• what you should do after you have bought i.e. when should you sell?

On the probability of outperformance for a Vintage-rated fund, pages 9-11 in the Vintage Funds Report 2021, we succinctly outline the consistently superior results our Ratings produce.

On when you should sell, this is easy for Gold Members of FundExpert.  We constantly stress the importance of having a plan for your investments: a plan to buy, a plan to review, and a plan to sell.

A plan to sell, for FundExpert Gold Members, is simple.  If you invest into a Vintage-rated fund, you review and sell the fund in two circumstances:

1. Review the fund in 12 months.  If it is no longer Vintage-rated, switch to a fund which is rated
2. If your stop-loss is breached between review points, usually on a fall of 10%, you will be alerted by FundExpert to sell, and protect your capital value

Conclusion

The AJ Bell list is better than many others, though we aren’t sure if investors are supposed to use it as a buy list or not.  In any case, even if such a list met our four criteria for an effective rating system, which this doesn’t, it remains as useful as a one-legged chair with no rules on reviewing and selling.