Shares in Hargreaves Lansdown (HL.) have dropped 11% since the start of the week as fresh questions are asked about how the FTSE 100 investment giant compiles its best buy list.
This week Woodford Equity Income suspended trading after months of investor redemptions caused liquidity problems in the fund. It was a heavily promoted fund on the coveted Hargreaves Lansdown Wealth 50 list of favourite funds.
The fund supermarket's inclusion of the fund over better-performing alternatives along with its own heavy investment in it have raised concerns about how Wealth 50 funds are chosen.
Hargreaves shares started the week at £22.52 and have since fallen to below £20. Shore Capital analyst Paul McGinnis said the fall in Hargreaves Lansdown's share price this week "probably reflects some reputational risk".
While other fund supermarkets, such as Charles Stanley and AJ Bell, removed Woodford Equity Income from their own best buy lists over a year ago, Hargreaves Lansdown has doggedly stood by the underperforming fund even as it shifted its focus to unquoted companies.
In January, Hargreaves Lansdown streamlined its Wealth 150 list of favourite funds down to just 50. The fund supermarket was criticised for including Woodford Equity Income over better-performing funds such as Fundsmith Equity.
Hargreaves Lansdown research director Mark Dampier said he had agonised over the decision but was a patient investor who had seen Neil Woodford go through poor periods of performance before.
But commentators have said the decision highlights how opaque Hargreaves’ process of selecting funds for its best buy list is. The firm has previously been accused of favouring funds which offer it a discount on their annual charge.
Hargreaves Lansdown said: "We use a strict quantitative and qualitative analysis process to indentify the funds we think are best in class. Woodford's stock-picking ability, track record, team support, and the fact he was willing to back his views with conviction meant he earned his place on the list."
Mark Polson, principal at platform consultancy the Lang Cat, said: “In amongst all this, there must be some hard questions asked of the best-buy list direct platforms. Pure retail dynamics and promotion have absolutely influenced investing behaviour and to suggest otherwise would be foolish. The big promoters of those lists need to take a long hard look at what they do and how they go about doing it to reassure their customers of their trustworthiness.”
The Wealth 50 list is hugely influential on where Hargreaves’ customers invest their £59 billion of assets. It has been estimated that its clients owned 38% of Woodford Equity Income in its first year and 27% in 2017 as its assets neared their peak of £10 billion.
It is only now that Woodford Equity Income has suspended trading after a flood of investor redemptions that Hargreaves Lansdown has taken the decision to remove the fund from the Wealth 50. It has also removed the Woodford Income Focus fund from the list.
Brian Dennehy, managing director at Fund Expert said Hargreaves had “over-promoted” the fund. “[Hargreaves] kept recommending it when there was no objectively good reason to do so. Now the reason it is removed their Wealth 50 is because ‘the fund can’t be traded’ – is that it?”
A further complication in the case of Woodford is just how much of Hargreaves Lansdown’s own assets are tied up in the funds. Hargreaves has £8.5 billion of assets across the six ready-made portfolios known as Multi-Manager funds which it offers investors. All of these invest in Woodford funds.
The HL Multi-Manager Income & Growth fund has a hefty 14% of its portfolio in Woodford Equity Income. Hargreaves Lansdown is even declared in the Woodford Investment Management annual report as a ‘related party’ because it controls more than 20% of the shares of the Woodford Income Focus fund.
Hargreaves added: "We recognise the landscape has shifted and the fund has faced headwinds not just concerning performance. We will be talking to Woodford, Link and the regulator ti ensure that we continue to make decisions that best serve our clients and deliver them the best possible outcomes."
Hargreaves has said it will waive its platform fee for investors while the fund's dealing is suspended and was encouraging Woodford to waive the fund fee.
Gina Miller, founder of the True & Fair Campaign, says the Financial Conduct Authority should also have done more to protect investors in Woodford Equity Income, particularly when its allocatin to unquoted stocks started to increase. Currently funds are allowed to hold up to 10% of their assets in unlisted assets.
She says: "The FCA did not change these rules even though there was a similar occurance after the 2016 Referendum result with property funds. The FCA's failure to act allowed a stampede of clients to head to the exit door before big property funds were suspended. Then, as with Woodford, the crisis ended in funds pulling the gates down to stop investors leaving."
The FCA said: "We expect all firms involved to uphold their obligations to act in the best interests of all investors and to ensure the fund's assets are sold in an orderly manner. A suspension should last no longer than necessary to allow the fund to build up sufficient liquidity to meet redemptions again."
