The people who sell investment funds are very cute. They know that most of us know little about it; and that those who do know something are far too busy to spend hours and hours researching the bewildering array of options available.
So what do they do? They helpfully provide us with a “best-buy” list, carefully researched by their team of experts. Pick any fund, or combination of funds, from this list, they’re effectively saying, and you’ll be fine.
This approach sounds great in principle, but the problem is that it completely ignores more than 50 years of independent, time-tested and peer-reviewed evidence that it’s a thoroughly bad idea.
After costs, only a tiny fraction of actively managed funds outperform the market over the long term, and they’re all but impossible to identify in advance. That’s why we shouldn’t be surprised at new research which shows that the best-buy lists promoted by the UK’s biggest DIY investing platforms are full of funds that go on to deliver poor-to-middling returns.
Admittedly this particular study wasn’t independent. It was conducted by a company called SCM Direct, which uses low-cost, passively managed ETFs. But its findings are in line with several other studies which have concluded much the same thing.
As SCM’s Alan Miller told This is Money, “Best-buy lists are, in reality, no more than a marketing gimmick that helps brokers to sell investments.
“The funds chosen appear no better than average, which is surprising given they are supposed to be an expertly-chosen selection.”
What’s so worrying is that investors rely hugely on these lists. And journalists love them. The brokers that compile them, Hargreaves Lansdown and Bestinvest for example, are media darlings. They’re always being asked to impart their expert wisdom on which funds investors should go for.
Without in any way calling into question the integrity of the individuals concerned, the use of brokers as investment correspondents is a blatant conflict of interest. Investing is an important subject for all of us, for our country and our economy. The same standards of editorial independence should apply just as much to the money pages as the front page. Newspaper editors and publishers should be taking this issue more seriously.
In the meantime, let’s hope that those involved in the FCA’s review of the UK asset management industry have “best-buy” lists on their agenda. What criteria are used when compiling these lists? What incentives, if any, are the fund houses offering to have their funds included?
My own view is that, without any moves towards greater transparency, tighter regulation in this area may well be required.
In the meantime, if you really want to choose an active fund, don’t rely on a list from a broker: do it properly. Better still, simply buy and hold a highly diversified portfolio of low-cost index funds instead.
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Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
