The Wealth 150 was launched in 2003 with the simple aim of helping investors to pick good quality funds for their ISA, SIPP and investment portfolios.
Below we have made available a full analysis of the Wealth 150. We believe this is the most transparent and comprehensive analysis of any preferred funds list ever published.
On average active Wealth 150 funds have:
- Returned 12.0% more than their sector
- Returned 13.5% more than comparative tracker funds
- Returned 6.5% more than their most relevant benchmark indices
Our Wealth 150:
- Strong performance in key areas such as UK All Companies, UK Equity Income and UK Smaller Companies
- We have found it difficult to find outperformance in US large cap funds; we suggest investors use tracker funds here
- For Wealth 150 funds we have negotiated down the average fund charge our clients pay from 0.74% to 0.61% per annum
Mark Dampier, Head of Research, Hargreaves Lansdown:
"The Wealth 150 has made life easier for hundreds of thousands of our clients over the years and since launch in 2003, our fund selections have on average outperformed their peer groups, exceeded the returns of comparative tracker funds, and beaten the most relevant benchmark indices.
We select funds for the Wealth 150 based on a combination of rigorous quantitative and qualitative analysis. This allows us to pick out fund managers whose performance has been a result of skill rather than luck, giving their funds a good chance of outperformance going forward.
Of course, there are no guarantees when it comes to investment returns, and we haven’t got everything right. For instance we have found it difficult to find active managers investing in US large caps who have consistently added value, and this is one area where our fund selections haven’t lived up to our expectations. As a result, we haven’t had a large cap US fund on the Wealth 150 since the beginning of 2013, and we suggest investors who wish to gain exposure to this market do so using an index tracker fund.
Alongside active funds we have highlighted passive funds to investors for several years, and we now have thirteen tracker funds on the Wealth 150 Plus. These funds can be useful for first time investors, or for the core of a portfolio, or to gain exposure to an area, like the US, where it is difficult to find active managers who add value.
It is important to set reasonable expectations for these passive funds in recognition of the fact they do not provide index returns. While fees are low, they still have an effect on returns over time, and this should lead to underperformance of the benchmark index. For example, since the Wealth 150 was launched in 2003, the average FTSE All Share tracker is now 28% behind the index as a result of the compound effect of charges over that time. Fund management charges for some tracker funds have come down considerably of late, which should help to reduce this drag on performance, but it will still be present to some extent.
When the Wealth 150 was born in 2003, I thought we would probably expand the number of funds on the list over time. However, while the number of funds available to UK investors has undoubtedly increased, the number of Wealth 150 funds has actually shrunk. That’s because there’s only a limited pool of talented managers with proven track records out there, and we believe that managers who outperform are lucky until proven skillful."
Five principles of the Wealth 150
- Look for skill rather than luck - our quantitative analysis seeks to answer the question of whether a manager has attained his or her performance by luck or by skill. We believe skill is repeatable, while luck eventually runs out. Our analysis filters out the returns that have come from a fund manager’s investment style, to build a picture of their stock selection ability.
- Long term track record - we require a fund manager to have a demonstrable track record across a range of market environments, as a rule of thumb we would say a seven year track record is appropriate. The investment industry is often far too pre-occupied with three year performance, in our view.
- Follow the manager not the fund - funds are basically legal structures, which collectively pool assets and invest them. What drives the performance of these investments is the manager, and so the manager’s track record is more relevant to us than the fund record. Our in-house quantitative analysis tool tracks the portfolio decisions of managers across their careers and encompassing multiple funds in order to build a better picture of their abilities.
- Invest with high conviction - whenever we put a fund on the Wealth 150 we do so with high conviction. As a test we ask ourselves whether we would stand by a manager through an extended period of underperformance as a measure of our conviction in their ability. If the answer is no, they don’t make the list.
- Reducing fund management fees - we use our clients' collective bargaining power to negotiate hard on their behalf for lower fund management fees. This has been very successful and clients now enjoy an 18% discount on the fund charges for a typical Wealth 150 fund. Lower fees also serve to improve investor returns as well as manager outperformance.
High quality funds at low prices
We have put considerable effort into securing lower fund charges for our clients, using their collective bargaining power to negotiate with the fund groups on their behalf. As a result our clients pay 0.61% for the average fund on the Wealth 150 compared to 0.74% for the same funds on the open market. We will continue to do this and expect to carry on driving down fund charges for our clients.
Below are three examples of funds run by managers with exceptional long term track records whose funds are available to our clients at a significantly reduced annual management charge.
EdenTree Higher Income
Annual fund charge for HL Vantage clients: 0.44%
Standard annual fund charge: 0.79%
Robin Hepworth isn’t a household name by any means, but as a fund manager he’s been quietly going about his business with this fund since 1994. Since then he has turned £10,000 invested into £77,400, compared to £41,100 from the sector. EdenTree Higher Income is available to HL Vantage clients for an ongoing annual fund charge of 0.44%, reduced from the 0.79% standard annual fund charge.
Lindsell Train UK Equity
Annual fund charge for HL Vantage clients: 0.52%
Standard annual fund charge: 0.72%
We have put together Nick Train’s fund performance data running back to 1986, and spanning funds like GT Income, M&G UK Select and Finsbury Growth and Income, as well as the Lindsell Train UK Equity fund which was launched in 2006. Over his career, Nick Train has turned £10,000 invested in 1986 into £413,000 today, compared to £188,700 from the FTSE All Share. Lindsell Train UK Equity is available to HL Vantage clients for an ongoing annual fund charge of 0.52%, reduced from the 0.72% standard annual fund charge.
Woodford Equity Income
Annual fund charge for HL Vantage clients: 0.60%
Standard annual fund charge: 0.75%
Neil Woodford may have had a difficult year or so, but his long term track record speaks for itself. Since taking over the Invesco Perpetual High Income fund in 1988, and including performance of the Woodford Equity Income fund, he has turned £10,000 into £310,400, compared to £121,400 from the FTSE All Share over this period. Both Woodford Equity Income and Woodford Income Focus fund are available to HL Vantage clients for an ongoing fund charge of 0.6%, reduced from the 0.75% standard annual fund charge.
Performance data in detail
The table below shows how the average active Wealth 150 fund in each sector has performed while it was on the Wealth 150, against its Investment Association sector, against the most relevant benchmark index and against the average tracker fund in the sector (where at least one tracker fund has been available for comparison since the Wealth 150 was launched). The green bars show where the Wealth 150 funds have on average outperformed, and by how much. The red bars show where the Wealth 150 funds have on average underperformed, and by how much.
Overall the average Wealth 150 fund has outperformed its peer group, the IA sector, by 12.0%. Where applicable, the average Wealth 150 fund has beaten the average comparable tracker fund by 13.5%. The average Wealth 150 fund has outperformed its most appropriate benchmark index by 6.5%.
Selected sector commentary
UK Equity Income is the most popular sector with our clients and we have backed some exceptional fund managers in this sector for a very long time, which has helped the Wealth 150 perform well. We have tended to favour fund managers who aim to balance delivering a high income now, with the aim to grow both the income and capital over the long term.
UK All Companies is a sector where we have always been able to find talented fund managers in the UK. We tend to prefer fund managers with as much flexibility as possible. This includes the ability to invest across the entire UK stock market, in large, medium-sized and smaller companies; back their ideas with high conviction; and be incentivised in a way that encourages them to focus on delivering excellent returns.
UK Smaller Companies is an area where talented stock pickers can really bring their edge to bear and the performance of Wealth 150 funds in this area reflects the rich nature of this hunting ground for skilful active managers.
At present we do not have any W150 funds in the North America sector, and we do not believe we will again in the foreseeable future. The US stock market is the largest and most heavily researched in the world, and this is one of the main reasons we believe we have had difficulty finding active managers who consistently outperform. We therefore currently prefer a low-cost tracker fund for exposure to larger US companies.
Likewise we no longer have any Technology and Telecoms funds on the Wealth 150. We are increasingly of the opinion that the structure of the market, which is dominated by technology giants such as Facebook and Amazon, makes it difficult for fund managers to add significant value above the index.
(What’s going on with Technology and Telecoms tracker funds? There is a small pool of tracker funds in this area (just two), and the average tracker performance in the table below has therefore been heavily influenced by one of these funds which tracks the FTSE TechMARK Focus index. This index has significantly outperformed the FTSE World Technology index, which is the benchmark used by Wealth 150 funds, hence why in this instance the average tracker fund has so heavily outperformed the Wealth 150 funds, and the index they use as a benchmark).
Global - our Wealth 150 selections have performed well against their peers, though on average have fallen short of the global stock market index. The US accounts for well over half of the world’s stock market, so the fortunes of many funds against the benchmark index can often be determined by their level of US exposure; too little exposure when the US is performing well can leave performance lagging the benchmark index. This is what has happened to many funds in the IA sector in recent years, as they often have a bias to the domestic UK stock market, and to areas where active management can add most value (see comments on efficiency of the US stock market above).
Mixed Investment - the funds we have selected in all three of these sectors have outperformed their peer group. However in Mixed 20-60% and Mixed 40-85% they have slightly underperformed their most appropriate benchmark index. One of the reasons for this is that the indices selected have a high proportion of government bonds, a market whose continued strength has wrong-footed active managers for many years now. As a result mixed asset managers have turned away from gilts, on concerns of over-valuation, only to watch prices continue to rise on the back of continued low interest rates and QE.
Summary and outlook
As a whole the Wealth 150 has performed well and there are areas where outperformance has been exceptional. Inevitably there have been a few areas of disappointment, and this has led to some sectors not having representation on the Wealth 150 any longer.
We will continue to build on our fund selection tools to deliver ever more detailed analysis of fund manager performance. We will also continue to negotiate hard on behalf of our clients for lower annual fund management charges. Our aim in pursuing both these goals is to improve the fund returns achieved by our clients.
We believe that the UK funds market is gradually polarising around high performance active funds at one end of the spectrum, and low cost tracker funds at the other. The rump of mediocre funds in the middle will find themselves increasingly squeezed as investors quite rightly become more selective when it comes to getting value for money from their investments.