Hargreaves cutting Lindsell Train is evidence of ‘beefed-up governance’

Could D2C platform provider revisit Fundsmith for its Wealth 50 list?

Hargreaves Lansdown’s decision to remove two Lindsell Train funds from its Wealth 50 list is a clear sign of its intention to increase transparency and scrutiny around its fund selection process in the wake of the Woodford scandal.

The direct to consumer platform provider announced on Thursday that it will remove the Lindsell Train UK Equity and Lindsell Train Global Equity funds from its favourite funds list at the end of the month because of Lindsell Train’s considerable stake in Hargreaves.

A stock exchange announcement on Thursday evening revealed Lindsell Train bought more shares in Hargreaves on 2 July, taking its stake to 12%, or about £1.2bn. It is the second largest shareholder behind Hargreaves founder Peter Hargreaves.

In a letter to clients, chief investment officer Lee Gardhouse said while the group continues to have high conviction in the Lindsell Train managers,  James Bullock, Nick Train (pictured) and Michael Lindsell, it is anticipating the investment in Hargreaves Lansdown shares could grow further given the continued popularity of the funds.

Gardhouse said: “We are therefore removing them from our favourite funds list at the end of the month in line with our procedures.”

Beefed-up governance

Altus Consulting consultant Rory Gravatt said it is quite common practice for firms not to promote funds that invest in their own stock because effectively it is self-aggrandisement.

“You are manipulating the market to further your own ends because you are generating demand in your own stock and ergo, you are making your stock more valuable.

“It is a sensible and quite responsible approach in fairness to them.”

Lang Cat director Mike Barrett said it is almost certain that whatever governance procedures Hargreaves had in terms of its Wealth 50 have likely been “beefed up” in the past few weeks.

“It’s not a surprise to see them being a little bit more transparent and visible with how they are governing that best buylist,” he added.

‘Unfortunate timing for Hargreaves’

Hargreaves has come under fire in recent weeks for allowing its clients account for such a large proportion of assets in the recently-suspended Woodford Equity Income fund, despite warnings signs over liquidity having been flagged for some time before.

When asked whether concerns over liquidity were also behind the decision to remove the funds, a Hargreaves spokesperson directed Portfolio Adviser to an article on its website which reiterates the decision was taken because of Lindsell Train’s sizeable holding in Hargreaves.

“We have no influence over whether a fund manager buys or sells Hargreaves Lansdown plc shares within their fund, it is the manager’s decision alone,” the article added.

Gravatt does not think the Lindsell Train funds had reached a dangerously high level in terms of Hargreaves’ clients’ exposure, however. He played down the idea that the funds were being cut on fear of liquidity issues, saying he has seen examples where several other investment houses and platforms have suddenly found they are significant holders of a fund and decided to withdraw.

“It is probably an unfortunate time for Hargreaves it has happened at this point with everything else going on with Woodford, but I do think in this instance they are taking responsible and appropriate action,” he added.

Transparency could draw a line under Fundsmith

Barrett said he would welcome improved transparency around how funds are selected for the Wealth 50, particularly considering the furore around the exclusion of Fundsmith Equity from the list’s predecessor, the Wealth 150, last year.

At the time, Hargreaves said the fund was omitted because despite “superb” performance, Smith’s flagship fund had no place on its list due to his OCF (0.95%) and lack of track record.

“There is speculation out there for that fund that the reason it is excluded is Fundsmith does not offer a discount to anybody and so full transparency could potentially draw a line under that one.”

More widely, Barrett noted how full transparency has been damaging to Woodford in recent weeks, but said he can’t foresee any unintended consequences from further clarity around the Wealth 50.

“The more visibility around their process and how they monitor Wealth 50 funds and how you get on and off it, the better.”

Revisit Fundsmith?

Chelsea Financial Services managing director Darius McDermott said there is a possibility Hargreaves will revisit Fundsmith Equity which is a similar fund to Lindsell Train Global Equity.

Portfolio Adviser contacted Fundsmith for reaction. A spokesperson said the firm did not have a specific comment on the removal of Lindsell Train from the list, but directed PA towards remarks made by Terry Smith in January when the Wealth 50 was announced.

Smith said at the time: “I have long said that Hargreaves Lansdown’s recommended funds were chosen mainly for fund managers’ willingness to comply with a charging structure which enables Hargreaves Lansdown to maximise its own profitability, and not because they perform well for investors. This needs to stop.”

Lindsell Train was unavailable for comment.

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