Hargreaves slams questions over Wealth 150 omission

Fundsmith Equity shunned despite lower fees and longer track record than some constituents

Mark Dampier: 'Give Woodford at least three years'

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Hargreaves Lansdown has come out fighting against critics who say its rationale for shunning Fundsmith Equity from its Wealth 150 doesn’t stack up and that the investment platform is not one to criticise others about fees.

This month, the UK’s largest direct-to-consumer (D2C) platform reiterated in a fund research note that despite “superb” performance, Terry Smith’s flagship fund had no place on its funds buy list due to his ongoing charges figure (OCF) and lack of track record.

Fundsmith Equity launched in November 2010 and has an OCF of 0.95%.

“I don’t think the reason Hargreaves gave really stacks up with the fact the fund is as old as it is,” says Wellian Investment Solutions CIO Richard Philbin. There are 14 funds on the Wealth 150 younger than Fundsmith Equity.

But Hargreaves research director Mark Dampier (pictured) tells Portfolio Adviser the firm’s critics are “talking total bullshit as usual” and that it is unreasonable for them to expect the Wealth 150 to include Fundsmith Equity when similar funds like Lindsell Train Global Equity are available for almost half the fee.

Nick Train’s £5.3bn fund is available for 0.54% via Hargreaves. It launched in March 2011.

Wealth 150 includes other untested funds

Hargreaves Lansdown seeks funds that have been through a full-market cycle, said analyst Jonathan Curtis in the Fundsmith Equity research note published on 8 October.

Lindsell Train Global Equity is among four of the 14 funds younger than Fundsmith Equity in the Wealth 150 that sit in the Global sector. The youngest, Jupiter Global Value Equity, launched just over six months ago in March, while the Schroder Small Cap Discovery and SLI Global Smaller Companies both launched in Q1 2012.

Wealth 150 funds with shorter track records than Fundsmith Equity

Fund  Date of launch
Aberdeen Latin American Equity 07-Feb-11
 Axa WF Framlington UK 02-Mar-16
First State Asia Focus Accumulation 24-Aug-15
Jupiter Asian Income 02-Mar-16
Jupiter Global Value Equity 27-Mar-18
LF Woodford Equity Income 02-Jun-14
LF Woodford Income Focus 20-Mar-17
Lindsell Train Global Equity 16-Mar-11
Marlborough Multi Cap Income 01-Jul-11
Marlborough Nano-Cap Growth 31-Oct-13
Pyrford Global Total Return 01-Jul-11
Schroder Small Cap Discovery 15-Mar-12
Standard Life Inv Global Smaller Companies 19-Jan-12
TM Sanditon European 25-Sep-14
Source: Hargreaves Lansdown

The platform often points to fund manager’s track records on previous mandates in its fund research for its younger Wealth 150 constituents. For example, it draws on Neil Woodford’s track record at Invesco Perpetual during the 2008 financial crisis to support its favourable research on the star fund manager’s Equity Income fund, which launched in June 2014 and is a Wealth 150 constituent.

But elsewhere it says Jason Pidcock is “starting with a blank sheet of paper” on the Jupiter Asian Income fund, which launched in March 2016. The platform admits Ben Whitmore, manager of the the youngest fund on the buy list, has a short track record when it comes to global equities and that Global Value Equity may perform differently to his other ventures. Hargreaves has negotiated discounts of 0.29% and 0.42% respectively on the Jupiter funds.

Morningstar says Smith’s track record on the Tullet Prebon pension fund highlights his ability to add value over a market cycle. “While returns have benefited from style tailwinds since launch, we believe Smith has added significant value above and beyond the fund’s style bias,” says senior analyst Peter Brunt in a research note. The fund has a gold rating from Morningstar.

Terry Smith versus Nick Train

Lindsell Train Global Equity has a concentrated portfolio with low turnover like Fundsmith Equity yet features on the Wealth 150 list despite launching five months after Smith’s fund, says Philbin. “What you’ve got there is two very similar approaches but one’s on the list and one isn’t.”

The Multi-Strategy Portfolio II Philbin runs for 8AM holds 10.3% in Fundsmith Equity, the highest allocation of any multi-manager fund in the Investment Association universe, according to FE Analytics. Brown Shipley Cautious holds the next highest allocation with 6.1%.

Brown Shipley senior fund manager Simon Nicholas says they are comfortable holding funds with a three-year track record. “We put a higher weight on time periods that are closer to the present day and reduce the weighting further into the past,” Nicholas says.

Fundsmith Equity versus global equity funds in the Wealth 150

Fund 6m 1yr 3yr 5yr
Fundsmith Equity 8.02 7.14 76.76 139.41
Lindsell Train Global Equity 9.53 14.02 72.70 134.88
Jupiter Global Value Equity 1.08
SLI Global Smaller Companies 4.67 6.21 78.78 96.52
Schroder Small Cap Discovery -11.90 -14.25 20.13 31.39
IA Global sector 3.64 1.04 43.07 57.19
MSCI World index 7.77 4.55 52.99 76.59
Source: FE Analytics

Philbin does not hold the Lindsell Train Global Equity fund because of its high degree of overlap with Fundsmith Equity, which the Multi-Strategy Portfolio II has held for six years.

But Dampier says the similarity between the funds is exactly why Fundsmith Equity does not feature on the Wealth 150. “Explain to me why I’d want to put two funds on there when one is double the price. It doesn’t make sense. I’ll happily relook at it if Fundsmith wants to lower their price.”

‘Rich’ for Hargreaves to talk about high fees

At £17bn, Hargreaves Lansdown said Fundsmith Equity could pass on economies of scale. Curtis also said Smith’s buy and hold approach and short track record meant the OCF was too high compared to its peers in the Global sector. Fundsmith Equity clean share class is in the middle quintile of global equity funds, according to Morningstar.

“It’s a bit rich coming from the most expensive platform there is,” says Lang Cat consultant Mike Barrett. Hargreaves is up to 20 basis points more expensive more than some of its direct-to-consumer rivals.

But, Dampier says Hargreaves negotiates more than the fee differential it has with its rivals, such as Fundsnetwork. “You’re accusing me of having an expensive platform at 10 basis points [extra], but you’re giving us no credit for knocking down prices.”

Philbin says it is a well-known secret Hargreaves uses the Wealth 150 to negotiate lower prices with fund groups. “The cynic in me suggests that maybe Fundsmith don’t play the same game as other groups when it comes to the discounting of AMCs,” he says.

Fundsmith doesn’t need the Wealth 150

Hargreaves has tried to negotiate lower fees from Fundsmith, Dampier says. “But they’re not going to lower the price.”

“We’re the ones that have been trying to drive prices down and we get absolutely no praise for it whatsoever. Pre-RDR everyone went on and on about bringing fees down so there we are, on the frontline, bringing fees down and all I’m getting is criticised for it,” he says.

Fundsmith probably doesn’t see negotiating down its charges as being worth its while, says Barrett.

For Fundsmith they’re selling bucketloads of this fund anyway. For other fund managers getting on the Wealth 150 means selling more of their fund, which compensates for giving up margin and the complexity of running multiple share classes.”

Vanguard is another fund group that does not feature on the Wealth 150 despite being a popular seller with retail investors, he says.

There are other Global funds on the Wealth 150 list with higher charges than Fundsmith Equity. The SLI Global Smaller Companies charges the most with an OCF of 1.05%. Schroder Small Cap Discovery charges 0.97% and Jupiter Global Value Equity has the same OCF as Fundsmith Equity.

However, Dampier says it is unlikely the Wealth 150 would add funds charging more than 1% in future. “We’re always relooking at things, so don’t expect those to stay on either.”