Miss Mackay's Money Microscope: the investment men from Del Monte

Businessmen wearing the same suit and tie

Nine of the UK's major platform providers have influential shortlists of funds, sharing their research teams' top picks.

I estimate these nine platforms look after about £105 billion of customers' money today, of which about £60 billion sits in funds. Hargreaves and Fidelity dominate the directly invested funds pie.

So just how influential are these lists? Some platforms are hesitant to disclose this. Why? Industry sceptics whisper about commercial funny business and 'pay to play', and more sensitive platforms may downplay the impact of these preferred lists to their broader audiences.

But fund managers looking for sales want to be one of the chosen few, and so platforms love going to meetings with these guys and talking up the power of their preferred lists.

DOUBLE-EDGED SWORD

They are therefore managing a double-edged PR sword. Whispers behind the scenes, the odd off-the-record email and a hint over a glass of wine suggest to me that about 60 per cent of all new fund flows across all platforms trickle into these lists. So for fund salespeople, getting the research Man from Del Monte to say yes is increasingly important.

I know from personal experience the impact these lists have. By way of example, I'm a very happy holder of the Lindsell Train Global Equity fund in an Isa, having been alerted to this asset manager by Hargreaves Lansdown who include it in their Wealth 150+ list.

I think many investors out there need a helping hand to whittle down the ridiculous number of funds in Europe - about 90,000 of the things, if you include every flavour and so-called share class. Indeed, there are probably only about 300 good ones for us retail folk.

Notwithstanding the clear need to help investors sort the wheat from the chaff, there's a question in my mind about how well the Del Monte guys are actually doing.

So at Boring Money, we went through all the preferred lists, identified those that get the nod from four or more platforms, and approached the helpful people at Morningstar to assess the performance of these funds.

How good are the fund selectors - and if we follow their suggestions, are we looking at the wisdom, or the folly, of crowds?? The table above (click to enlarge) shows the results.

Green boxes identify a timeframe in which any given fund did better than the average fund in its sector. Red boxes show relative underperformance.

I was surprised to see so much red. Aren't these funds supposed to be the crème de la crème?

EXCUSE 1: DIFFERENT TIMEFRAMES

The Aberdeen Asia Pacific Equity fund illustrates one of the key problems of the investment world. The industry's timescales are totally misaligned with customer timescales. This fund was a cracking fund for many years and if you look over a 10-year period it has done OK.

But it's been a bit of a shocker for the last few years. Is it responsible behaviour to keep investors coming to this underperforming fund in order to try and prove a conceptual belief that investing should be a 15- to 20-year game, as one very senior research fellow told me?

I get a bit irritable when fund managers explain that it's a 10-year game at least. That's the party line, but it doesn't make sense to me as a customer. New data from the Investment Association (IA) confirms that the average time we hold onto a fund for has fallen from six years to four years since 2005.

We seek more instant gratification, and technology has made it easier to switch things around. We don't want to hang around for five years in a loser fund (especially if only 50 per cent of the industry's preferred picks are outperforming the sector average).

I can hear the City blokes in suits sighing, revving up to email me and tell me why I don't understand their world. But it strikes me that that the sooner the investment industry starts managing money the way people want it, instead of telling them why they're wrong to want what they do, the better off we'll all be.

EXCUSE 2: SECTORS AND THE ODDITY THAT IS AN INCOME FUND

A look at the M&G Global Dividend fund illustrates a few other issues and complexities. First, its name suggests that it belongs in the IA global equity income sector but no, it's stubbornly in the global sector, so comparison with its peer group is arguably skew-whiff.

Secondly, comparing income funds to a sector average is tricky because if they pay a chunkier income than average, you'd expect the unit price to be a bit lower. In other words, if it pays out a good income, the capital value is likely to go up a bit less.

For example, Artemis Income has paid a historic yield of circa 3.7 per cent, so I think there is a decent excuse (or at least extenuating circumstances) for some of those red boxes against its name.

EXCUSES NOTWITHSTANDING

So, although there are reasons why some of these funds have red boxes against them, I still think it's problematic that only half of the DIY preferred list funds outperform their sector average. It raises questions which I think the platforms need to address.

Conversely, I'd suggest that those funds with consistent green boxes above, which also get the nod from the professionals, are probably fairly safe bets for any given asset allocation.

First State Asia Pacific Leaders and Argonaut European Alpha are examples of funds that have both consistently outperformed sector averages and had the thumbs-up from the boffins.

I'm increasingly contacted by novice investors, struggling to make a first move. I am sometimes minded to direct them to these preferred lists for a helping hand.

But a look at the above doesn't do much to persuade me that anything other than a single passive multi-asset fund - a Vanguard LifeStrategy or a Blackrock Consensus - is a very good way to just get people started and used to markets for a few years.

At least that way you know, accept and only pay for the fact that you'll be average. Given the average investor's timeframes, using these fund lists appears to be a lot less likely to lead to outperformance than the lay investor might suspect.


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