Getting the best out of fund best-buy lists

Despite this, buy lists do still play an extremely important role for DIY investors. With thousands of funds available in the UK, they can be an essential tool to help you whittle a large universe of possible holdings down to a smaller selection. Buy lists are also arguably more robust than some might suspect – especially those run by the likes of retail investment platforms.

Buy lists, including the IC Top 100 Funds and selections compiled by platforms and other organisations, are still worth using as part of your fund selection process. But it is important to acknowledge their limitations, refer to more than one list where possible and always apply your own due diligence.

How to use the lists

While investors might tend to use just one or two investment platforms based on criteria such as charges, the level of investment choice available and the platform’s functionality, buy lists tend to be easily accessible even for non-customers. These lists are not exclusive to the usual suspects: Barclays’ Smart Investor platform offers one, for example. Research providers such as FundCalibre also run lists of preferred funds, which can be found online.

Whichever platform you use, it can be useful to scour as many different lists as possible for ideas. Those that commonly appear on different lists can, at least, be viewed as funds that are widely backed and have tended to impress specialists.

Graham Bentley, managing director of investment consultancy gbi2, suggests investors make note of those funds that “keep coming up every time”. “There will be lots of variants but some are on everyone’s list,” he says. “That should be a comfort, although it’s not a promise that they will outperform.”

A look at the UK equity growth funds highlighted by teams at the main retail platforms illustrates this point. Liontrust Special Situations (GB00B87GRQ11), a fund with a strong track record and a highly regarded process, currently features on the buy lists of AJ Bell Youinvest, Interactive Investor, Bestinvest and Charles Stanley, while Hargreaves Lansdown and Fidelity's lists feature the Liontrust UK Growth (GB00B8BTWR23) fund run by the same management team. As the chart shows, the story is similar in the UK equity income space: while a wide array of different funds do crop up, a few names will appear in more than one list.

This could be one way to identify those funds that have either delivered the goods or tend to stand out in other respects. But if a fund is a regular on lists it can also be a sign that it has become a crowded trade, or may even have its best days behind it.

On the other side of the coin, some teams highlight funds that are less well known: Fidelity’s Select 50 list includes the Maple-Brown Abbott Asia Pacific Excluding Japan fund (IE00B284Z023), while Bestinvest's list features the GuardCap Global Equity fund (IE00BVSS1C10). More obscure picks can provide you with some inspiration, but may not always be a good fit for your portfolio: it is important to remember that buy lists cannot cater to your individual needs.

As such, it is worth digging deeper when assessing funds. Looking closely at the criteria behind a buy list and the justification for why a fund is included can shed light on why it might stand out for you. Investors should always assess a fund’s stated merits – from the manager’s investment style to the themes they focus on – and assess these in the context of what they are looking for in a portfolio. As explained in the introduction to the IC Top 100 Funds list, it is important to check whether a fund matches your appetite for risk and invests in line with your views.

While platform research teams are keen to review their fund selections and avoid any bias, they can have preferences that might influence the list. Some may, for example, have strong views on whether now is the time for value investing to finally shine. It can help to be aware of such leanings, where possible.

The teams behind buy lists also tend to provide updates on the funds covered, where relevant, and any changes to the list. These can help you keep on top of major developments, such as a change of lead fund manager.

What’s available

The most prominent retail platform lists, listed in the table, tend to focus on similar criteria when looking for the best funds, from identifying a fund management team that has generated outperformance via skill rather than luck to ensuring that the team sticks to a rigorous investment process in all market conditions.

There also tends to be some focus on cost, although this is not the first characteristic mentioned by most platforms. This is another area where buy lists have run into controversy. Terry Smith has previously criticised Hargreaves Lansdown for not including his flagship fund, which charges a relatively high fee but has generated admirable outperformance, in its buy lists. However, there is a good argument for favouring a fund that is cheaper, or grants a platform a discount, if its performance is similar to one that looks more expensive. Interactive Investor notes that it would tend to exclude funds that are “too expensive” compared with rival offerings unless performance were good enough to justify paying more.

A full breakdown of the criteria used by each team, as well as the methodology employed and the system used for reviewing the list, tends to be given online.

It is also worth noting which parts of the fund market a list covers and how this corresponds to your preferences. While all will tend to cover both active and passive funds to some extent, the latter gets greater coverage in some lists than others. Fidelity notes, for example, that its Select 50 list “predominantly features actively managed funds”, with passives only included in specific cases. The list included just two passives at the time of writing: iShares Global Property Securities Equity Index and iShares UK Gilts All Stocks Index. Bestinvest’s Top Rated Funds list also shows a preference for active, with only eight passives featured.

Charles Stanley splits out its active and passive lists online. Investors Chronicle readers may note that while the IC Top 100 Funds are purely active, our Top 50 ETFs list caters for those looking for low-cost trackers.

Those who like to use investment trusts should note that they are not covered by all the lists. Hargreaves Lansdown’s Wealth Shortlist lacks any closed-ended picks, although the platform does separately provide research on investment trusts. Closed-ended funds were also absent from AJ Bell Youinvest, Bestinvest and Fidelity’s lists at the time of analysis. AJ Bell does provide a separate list of investment trusts.

In some cases such an absence may be justified. Hargreaves Lansdown has previously argued that the investment trust market may struggle to deal with the trading volumes that can stem from its buy list. The use of gearing and the share price dynamic can also mean that investment trusts can, in some cases, be riskier and less predictable than their open-ended counterparts.

However, an absence of trusts could limit a list's selections in illiquid asset classes such as infrastructure, where direct investment in such assets is well suited to the closed-ended fund structure. Those investors who want to whittle down their potential investment trust picks may rightly favour the likes of Interactive Investor and Charles Stanley, who do highlight some closed-ended products. The IC Top 100 Funds list covers investment trusts, as do some research organisations such as FundCalibre.

Environmental, social and governance (ESG)-centric investors may want recommendations aligned with their ideals and this is another area platforms have been talking about more. Hargreaves Lansdown argues that its Wealth Shortlist, launched at the end of June, has an increased focus on ESG funds, for example. In some cases ESG picks are easy to identify: Charles Stanley’s website can break out socially responsible investments separately from the other constituents of its buy list, for example. Interactive Investor runs a list of 30 ethical funds, which includes both passives and investment trusts.

Other decisions

What you can actually buy, and at what cost, will ultimately depend on your choice of platform. Platforms can vary widely in terms of the investments they offer, their general functionality and their fees. Investors with a more proactive approach may well be happy paying up more for greater flexibility.

Buy lists can tell you something about which platform may suit you best. Some lists may reflect a greater choice of funds, or highlight the fact that a particular platform has secured discounts on several of your favoured funds. Similarly, some platforms may appear more open to more niche investments, from ESG funds to investment trusts and exchange traded funds (ETFs).