Hard questions need to be asked about why Hargreaves Lansdown ended up owning at least one fund almost its entirety and significant majority stakes in others as the D2C platform and funds business beefs up independent oversight of its funds buy list and investment team.
The Sunday Times revealed the D2C platform provider was canning its controversial recommended funds list after just 16 months in favour of a list picked and overseen by an independent panel, including two new independent directors to oversee governance and investment decisions.
The platform provider is also mulling a revamp of its fund research notes in order to be more transparent and reduce the large stakes it holds in some funds through its multi-manager range, according to the newspaper. It is also understood to be making changes to the fee discounts it offers on some funds.
High exposure to certain funds is new board’s most pressing issue
GBI2 managing director Graham Bentley says the most pressing issue for the independent governance board to address is the high exposure Hargreaves has to certain funds across its fund range.
According to Morningstar figures quoted by the Sunday Times, Hargreaves’ managers own 97.4% of the £161m First State Asia All-Cap fund, 60.4% of the £13m Jupiter European Smaller Companies fund and 53% of Odey Allegra International, which controls £150m.
The £2.8bn MM Multi-Manager Income & Growth Trust fund had 11.1% in the Woodford Equity Income fund at 30 September 2019, almost three months after it had suspended, according to its annual report.
> See also: Industry questions why Hargreaves assets in Woodford got so high
Portfolios should not have more than 5% in any one fund
Bentley says at Ascot Lloyd where he is independent chairman of the investment committee there’s a rule that states portfolios can’t hold more than 5% of any fund. This is to avoid liquidity issues arising from events such as a manager leaving and having to pull the majority of a fund’s assets.
“Then the people who are existing holders of the funds who aren’t with Hargreaves, ie the rump or small proportion of people who have just chosen to buy that fund, would get hammered with a cancellation price in terms of a valuation.
“If the manager has to sell stock to produce the cash to give to Hargreaves, it’s a fire sale so you basically have to close the fund in order to get the cash out, so there are huge implications of a group holding large chunks of a fund.”
Bentley says one of the first questions for the new committee to look at is why Hargreaves has allowed itself to get to the position where it holds such a big portion of certain funds. “Surely there were areas where they could dilute that holding using other managers. So I think that needs to be seriously looked at.”
He says it’s unclear what the line-up of the committee looks like and who will be chosen as the independent non-executive directors (INEDs), but in principle it sounds like the right thing to do.
Fee discounts all part of the game
Hargreaves has also been criticised for the fee discounts it offers certain funds on the list which critics claim has seen it favour certain funds over others.
Notably, when the firm slimmed down its Wealth 150 to the Wealth 50, it refused to hold Fundsmith Equity, stating the fund’s OCF was too expensive and that it preferred Lindsell Train Global Equity as a global equity product, as well as a preference for managers who have managed money through a downturn.
> See also: Hargreaves slams questions over Wealth 150 omission
This was despite Lindsell Train Global Equity being among four of the 14 funds younger than Fundsmith Equity in the Wealth 150 that sit in the IA Global sector.
But Bentley doesn’t think Hargreaves fee discount model needs to change, saying he has previously been associated with businesses whose funds have gone on a wealth list, and they are “bloody hard negotiations”.
“Basically they leave you to come up with the best price and, of course, that’s how it should work. So I don’t have too big an issue if they continue to offer discounts, and particularly now they’ve got an independent group committee and INEDs responsible for that.”
Bentley says it’s often advisers who moan the loudest about discounts because they lack the clout of the likes of Hargreaves when it comes to negotiating discounts
“It’s not often you hear people bleating on about the fact that somebody has managed to negotiate a price with an asset manager, but they do because it’s Hargreaves. Quite often, it’s advisers who get uppity about it because they can’t get their clients the same sorts of discounts.”
Key thing for governance committee is transparency
Langcat consultant Mike Barrett says the most important aspect for Hargreaves to address is transparency, and being clear about how any best buy fund list is constructed. “An independent committee sounds like it should be a big step in achieving this,” he adds.
Barrett thinks certain legacy decisions such as Hargreaves’ decision to favour Lindsell Train Global Equity over Fundsmith Equity when it revamped its Wealth 50 in January 2019 and its choice not to make investment trusts available on the platform were clearly explained at the time.
> See also: Hargreaves’ stubborn rebuke of investment trusts sparks liquidity debate
“Whether you believe those arguments are valid or not, is not necessarily the point. The point is the fact that they’ve made fairly clear statements around what they believe to be true.
“Yet, we’ll see what happens but if they start to turn away from that or pivot away from those positions I think they will need to explain why.”
He adds: “While a lot has happened since the current Wealth 50 list was launched in January 19, it does pose the question as to why this new list should be any more reliable than the old one.”
Importance of independent governance
AJ Bell’s platform carries open-ended funds, closed-ended funds and ETFs. It carries an explanation on its website along with videos on why it likes each fund as well as information on the holdings, positioning and performance.
It also includes the full list of changes that have been made to the list over the years and why those decisions have been taken.
AJ Bell head of active funds Ryan Hughes adds: “We also see the importance of independent governance and have had an independent chair of our investment committee for a number of years to ensure that the investment decisions we are taken are robust and well researched.”
