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12th February 2016
Fund buy list dilemma: venturing off the beaten track

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Critics have warned that the same funds are being selected time and again on buy lists, but are wealth managers willing to buck the trend and go off piste?

Patrick Toes, investment director at Myddleton Croft, says a buy list’s flexibility can often be determined by the size of the firm.

‘We are smaller and have fewer decision-makers,’ Toes said. ‘If something is good enough to buy then we have a meritocratic approach as to whether it should be included in the list. It would be less of an issue for us to go off the buy list than it would be for a larger firm.’

Toes does not have any issues using this flexibility and says it is the right approach for them. However, he likes to make sure that the buy list remains small and fresh, so that every fund on it holds its own.

‘There can sometimes be diversification for the sake of it, which isn’t good – we call that di-worse-ification,’ said Toes. ‘We tend to not have any “dead wood” in the buy list and to not have hundreds of funds.’

Differing stances

A different stance is taken by BRI Wealth. While the Midlands-based boutique is not regimented about its buy list, head of portfolio management Dan Boardman-Weston argues it is good for centralising the firm’s investment proposition.

‘As the majority of our business is discretionary wealth management, we very rarely have to move away from the centralised approved lists as they meet most clients’ requirements,’ he said.

‘If clients have more holistic needs, then we do have the ability to purchase investments that are not on the buy list. Rigorous due diligence is conducted on the potential assets and the results have to be signed off by the chief investment officer and myself.’

Bargaining power for lower fees

At the larger Charles Stanley, with a buy list of 205 funds – called a preferred list – investment managers are allowed to use it at their discretion.

Using a model called ‘autonomous investment management’, investment managers are supplied with recommendations and research on funds in the preferred list but are not under any obligation to use them.

Currently, around half of Charles Stanley’s assets under management are in these funds.

‘Is it popular? It depends. You have to treat yourself almost as a sell-side salesman, selling your ideas to your clients. You have to stimulate investment in the ideas and therefore stimulate flows,’ said Stephen Peters, investment analyst at Charles Stanley.

‘I don’t look at what other firms have on their buy lists. It is a small industry and we all talk to each other and go to the same events. But if I have two similar funds to invest in, the more well-known of the two will naturally gain more attention.’

Popular funds that are on several buy lists naturally attract more assets. However, AXA Wealth head of investing Adrian Lowcock says the lists need to be treated objectively and not taken as gospel. Instead, they should be used primarily as a filter tool.

‘The trouble is no single list is built in the same way so it is inappropriate to compare two lists with each other. Some act as a source for highlighting what that research team thinks are the best funds in each sector, while others focus on what they think are the best funds and don’t consider sectors,’ said Lowcock.

‘[Investors] still need to know or decide whether or not the fund is suitable for their objectives and attitude to risk and whether or not it is the right time for them to invest in a particular sector.’

Even though they should be treated more objectively, buy lists allow popular funds to remain popular because the lists at the biggest wealth firms can carry favour when it comes to negotiating lower fees. Meanwhile, smaller firms remain less able to attract assets and less able to cut prices.

‘It is a double-edged sword but if you can get more money into a smaller list of funds, it gives fund buyers better bargaining power to negotiate lower fees from the fund groups,’ said Peters.

‘When I have a large list the money is split out thinly. The bigger fund groups have greater distribution capabilities, whereas the smaller groups are less able to work in our business model. Whose fault is that then: theirs or ours?’