Choice is good for some investors. Some have the time to research which investments to buy from the thousands that are listed on platforms, perhaps because they are retired or work part time. Others enjoy the research process and find it a rewarding hobby.
However, for time poor or less confident investors, too much choice can be overwhelming and stressful. In the worst case, too much choice can stop them making a decision. And that means they put off starting investing, meaning they miss out on opportunities to grow their money.
So, although in the end investment platforms require you to make your own investment decisions, they also offer various forms of ‘guidance’ to help investors of different abilities.
The most common guidance offered is a recommended list of funds, also called a ‘select list’ or ‘best buy’ list. Platforms that offer this include AJ Bell, Hargreaves Lansdown, interactive investor, Fidelity, Charles Stanley Direct and Bestinvest.
While their lists are all different, they all aim to help DIY investors by providing researched and curated recommendations of funds with which to build portfolios. Usually comprising around 70 to 100 funds, each platforms’ recommended list provides a slimmed down selection of the wider universe of around 5,500 funds available to private investors in the UK.
One platform believes in recommendations so much that it has built its whole business model on them. Tillit is a relatively new investment platform, founded in 2021, that only offers a curated selection of funds to its customers, selecting the best-in-class active and passive funds across asset classes, regions and styles. Unlike other platforms, Tillit doesn’t offer investors everything available in the market.
Whichever platform you choose, there is usually something in the ‘best buy’ list that works for your portfolio, whether you are a novice or a seasoned investor. So, if you trust the recommendations, the list should be a helpful tool to guide your decisions.
Are recommended fund lists always good?
However, trust in these lists is a fragile thing, that is hard to win and easily lost. For example, investors with long memories may remember that in 2017, the FCA found conflicts of interest in D2C platform ‘best buy’ lists.
The FCA analysed non-public data for three direct to consumer investment platforms between 2006 and 2015. The findings published in 2017, found ‘affiliated funds’ – such as a platform’s own brands and those that pay greater commission rates – were “significantly more likely to be added to the recommendation list than non-affiliated funds” and “less likely to be deleted from these lists than non-affiliated funds”. The research also found that best buy list funds outperformed non-best buy list funds overall, but affiliated funds included in best buy lists on average did not.
Then followed the Woodford investment scandal of 2019. Around 300,000 retail investors were trapped in the Woodford Equity Income Fund when it was suspended in June 2019, with administrator Link Fund Solutions opting to wind it up four months later.
Hargreaves Lansdown – Mr Woodford’s most influential cheerleader – came under the microscope for recommending the Woodford UK Equity Income fund to its customers up to the fund’s collapse. However, Hargreaves Lansdown wasn’t the only platform to keep recommending the Woodford Equity Income Fund, even when potential liquidity and portfolio diversification problems emerged.
The scandal led to calls for much higher scrutiny of “best buy” lists. In a Dear CEO letter sent in February 2020, the FCA stated: “Firms operating Best Buy lists must construct them impartially and manage conflicts e.g. preference for funds offering discounts over formal and objective criteria, lack of independence of research teams and associated governance. Processes for clear selection, monitoring and deselection of funds on lists should be documented, understood and followed.”
Hargreaves Lansdown relaunched its rated list a year after the Woodford scandal, rebranding it the “Wealth Shortlist”, in an attempt to restore investor confidence. The platform also said it was doing additional risk and liquidity monitoring for the new list.
It’s now more common to see mentions of the governance surrounding the selections on the lists, with Hargreaves Lansdown publishing an overview of its oversight and governance processes. Plus, platforms give more transparent rationales to explain why the fund has made the list, with Interactive Investor’s being particularly detailed.
Potential conflicts of interest are also more likely to be called out and addressed. For example, Fidelity’s Select 50 list includes three Fidelity-branded funds. However, Fidelity states on the website: “Select 50 is designed to be completely impartial. It includes funds from a range of fund managers and Fidelity is treated no differently to any other manager. Any funds selected are chosen on investment merit alone. We partner with Fundhouse, an independent fund research company, to add independence and enhance our fund selection process.”
It’s also usual to see historical records of funds that have been added to or removed from the lists – and the reasons for this. AJ Bell’s website shows changes to its list going back to 2017, while Hargreaves Lansdown and Interactive Investor both publish a record of additions and removals since 2020.
It’s important to look at who is behind the recommendations. Some platforms use in house analysts. Hargreaves Lansdown and AJ Bell do this, as does Fidelity. Others, for example, interactive investor, use external research teams. Interactive Investor’s website includes a detailed methodology of how it compiles the lists, in partnership with Morningstar’s Manager Selection Services group.
Is past performance a good indicator of future performance?
The platforms are making no guarantees about whether these funds will outperform in future. Nevertheless, there’s some evidence that performance has been good in the past. The academics behind the FCA’s 2017 study found a ‘statistically significant’ outperformance. Even with accusations of commission bias, these funds did do better.
There will always be outliers. But the performance of recommended lists is transparent in the sense that you can see performance of individual funds on the list shown on the websites. Always check this before making a purchase.
Some platforms go further by publishing overviews of performance, but these differ widely in execution. Hargreaves Lansdown’s publishes a performance overview, but figures are only until the end of 2022. Interactive Investor publishes quarterly performance updates on its recommended funds, with the latest update in January 2024.
While Tillit publishes an annual performance report to hold itself accountable. Its website states: “We analysed the performance of the TILLIT Universe over 5, 10 and 20 years and found 93% of our active funds with a 20-year track record outperformed their benchmark after fees over the period.”
You may also feel an additional level of comfort if the platforms are also using their recommended funds in their baskets of funds (sometimes called model portfolios), where good performance has added reputational risk.
Bought and sold (people like you bought…)
What is also useful in addition to the lists is where platforms show the most bought and most sold investments by customers. Interactive Investor, for example, publishes this information on a monthly basis. The popular funds aren’t always the same as funds on the best buy lists and there is a bit of an information lag. However, if you see one of your funds being bought or sold by lots of investors, that could be a signal to buy more or a warning bell to exit.
The benefit to all the platform recommendations is that the information is usually provided for free, so even if you’re not a customer of a particular platform, you can still see the recommendations. So, if you find a fund on a recommended list that seems useful, perhaps see if other platforms recommend the same fund, and supplement this with your own research into factors like performance, manager tenure, top holdings before making your purchase.
Meanwhile, however good the performance of a particular fund, it’s only one building block for your final portfolio. Your overall performance will only be as good as the portfolio that you eventually construct. So make sure that you diversify your holdings to spread your risk and review your holdings at least once a year.
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