For the first time, anyone can track the performance of the pooled fund recommendations the specialist investment adviser and ratings firm makes to its clients from the period it went live over a three-year period.
The decision to publish the track records of its fund selection process publicly is in large part motivated by the Financial Conduct Authority’s recent criticisms of “buy lists” and fund rating systems.
“It is just the right thing to do,” stressed Fundhouse co-founder Rory Maguire, who agrees with the FCA that the UK fund selector industry is blighted by conflicts of interest, an absence of regulation and a lack of evidence of adding value.
This last point is particularly profound, in Maguire’s view and is “an indictment on our profession”.
“As a firm involved in manager research and selection, we need to demonstrate that our active fund selection is adding value to the end client and we feel that it is imperative that we are transparent with this information,” he said.
“If our active fund selection is not adding value above a passive index, surely we have no real value proposition and don’t deserve our fees?”
Unlike other firms, which have some form of tiered positive ranking systems, like Morningstar’s medals, or which publish ‘best buy’ lists, often featuring a high proportion of their own affiliated funds, Maguire is a firm believer in publishing the good with the bad.
Its Tier 1 rating represents the top funds where the group believes the odds of adding value are high; Tier 2 refers to funds with a positive rating that have good but not significant odds of beating the benchmark; and Tier 3 are funds with a negative rating, which the team believe are likely to underperform.
Importantly, Maguire says that Fundhouse’s tiers are “aligned with expectations”.
Tier 1 funds outperformed 67% of the time, net of fees, when measured against the passive index benchmark, while funds identified as Tier 2 outperformed the benchmark 53% of the time.
Fundhouse prefers comparing indvidual funds against a passive benchmark instead of a peer group, arguing that this is the best way to determine whether a product actually adds value.
“It is remarkable how often fund groups outperform their peer group and not the benchmark,” Maguire said.
The “strongest signal of all” is produced from the negatively rated Tier 3 funds, which underperform 82% of the time.
“We often get asked why we produce negative ratings,” said Maguire, “this is why. It is an incredibly valuable proposition to our customers to avoid poor investments, as much as it is to invest in a good one.”
Neither does Fundhouse derive the bulk of its recurring revenue from fund managers whose products it ranks and recommends to advisers. Instead, clients pay for the privilege of accessing the firm’s ratings
While Maguire declined to quantify how much clients were paying for the firm’s rating services, he added that puts the onus on Fundhouse to make sure the quality of the work is high.
The track records of the rated funds are now available on the firm’s website.
