Hargreaves puzzler

dunstonh

jaybeetoo wrote: »

Other platforms don’t think that’s a problem.

HL is 3rd or 4th in terms of size.

And those using FNZ software can be viewed collectively as the backend of FNZ does the work. Not the platform itself.

It really isnt a problem.

bowlhead99

Aminatidi wrote: »

I believe I read in an interview with Mark Dampier of HL, pre-Woodford debacle, that their issue with IT's is simply that at the size of HL many IT's simply don't have the daily trading to support it.

Which is fair enough.

If they tell their baying masses with billions of capital, that ABCXYZ Investment Trust plc is a sensible purchase because it's a well-run investment scheme with a decent portfolio and prospects, it's just a recipe for disappointment.

A closed ended fund, as distinct from an open ended one, is literally closed to new business. If a load of HL customers want to buy in, they will have to buy the existing shares of the trust off someone who five minutes earlier was happy to hold them at the market price. So the customer's order is only going to get satisfied if the customer offers more than the previous market price of, say, 100p. The customer will be paying more than the value of the assets that he (as owner of the IT) will effectively start to co-own, and if the demand for shares in the trust continues, the price of the trust will be maintained at the new higher level

With the increased price relative to value of the IT's underlying net asset, HL would have to update their 'guidance' overnight to say - e.g. - that ABCXYZ is still a reasonable purchase because, e.g.: although you are paying 5% more than the value of the trust's underlying assets, what you are buying for your 105p per share is a package of shareholdings of good companies bundled together as a managed product by a smart investment manager with a future strategy for holding, exiting and reinvesting the proceeds and a good track record of implementing such strategy, and so if you are happy to own the shares for a decade it is reasonable to be paying 105p, because that package of underlying assets and investment advice is worth more than the 100p 'sum of its parts', as proven by the fact that investors within a fair stock market are currently willing to pay that much for it.

But then the next day, with the billions of customer money trying to get into the trust which only has a few hundred million of assets, the market piece of entry has perhaps ballooned to 110p while the underlying assets are still only worth 100p.

The website recommendation then either needs updating to say it's still worthwhile paying 10% more than the underlying assets are worth to get access to that particular mix of assets and investment strategy (and perhaps gearing and other techniques employed by the trust), or it needs updating to say it's still a decent trust but maybe not worth the large premium price, in other words it's no longer a recommendation at all, because it's risky to pay 110p for 100p of assets when in other market conditions you may only be able to sell the 100p of assets for 90p, even if the trust NAV didn't change and the individual assets are still 'worth' 100p.

So, the HL initial research piece on the investment trust, if it was heavily promoted as something for their million customer accounts to take seriously as one of the better investment products to buy (as their wealth 150/50 list has been), may only be valid for a day or two at a time, due to the inaccessibility of closed ended vehicles and the price premiums and discounts that can emerge rapidly. And HL's recommendations (sorry, research) in relation to ITs would be in products that are inherently more complex than mainstream OEICs due to potential gearing, derivatives, discounts/premia etc, which may not be fully understood by investors.

So, it's understandable that a firm like HL may not want to go heavy into the world of investment trusts promotion, other than pre launch. In the pre launch phase it can put caveats about what the trust might do when launched, and it is being paid hansomly for making the prospectus available because the trust will give it a small commission on each £ of newly issued share capital. Once launched and discounts and premia are in play, and there is nobody paying a commission for sourcing new investor capital (because no new investor capital is being sought), it is more complex and less lucrative to recommend your customers get involved with the trust.

On an ongoing basis, (1) a well established investment trust does not pay to be promoted or offer fee breaks to be promoted because it doesn't really need new capital, and (2) you can't make customers pay heavily to access the investment trust through your investment platform because it is not the sort of financial product that needs to be distributed to retail customers through the infrastructure of an investment platform. It can be bought by any chump with a CREST account. This means that in respect of ITs, all the sophisticated platforms are competing on price with the online execution-only brokers who will obtain you a share in the trust for a low fixed fee and a nominal annual inactivity fee if you're not trading.

As the platforms such as HL don't have a clear source of income from customers who only want to buy exchange-traded products like ITs and ETFs and hold those products for the long term, it is not the sort of thing they are likely to promote with equal prominence to open ended funds. OEICs and UTs are (a) simpler to explain when promoting and (b) require the customer to employ an investment platform to get access because they can't just be bought cheaply on a stock exchange from an existing shareholder, so you can earn money from the customer for that specialist service. So, no wonder they promote open ended funds while they don't promote already-launched ITs within their 'good way to grow your wealth' lists.

So, ITs are not offered by investment platforms as a money spinner, they are only offered/promoted because they know some investors who will pay for platform services might also want to access these closed ended trusts they heard about, and are looking for a one-stop-shop. If there are no investment trusts mentioned anywhere on the website, customers might think they should go elsewhere to buy them, and then having shopped elsewhere might pull their more lucrative OEIC business from the platform too.

As such, an investment platform featuring or talking about how they offer ITs, is a defensive measure to retain customers, or to attract customers to whom you can hope to cross sell other services, rather than looking to actually make a lot of money from the customers buying investment trusts per se.

Rollinghome

masonic wrote: »

Yet HL does have a history of heavily promoting certain new IT launches, which is going to have a similar effect.

Do you remember when they promomoted the ill-fated Fidelity China Special Situations IT, to be managed by ex-star, Anthony Bolton.

Initially HL had been very positive about Bolton's new venture, until Fidelity decided it would be an IT and not a fund, so no trail commission. Dampier immediately used his column in the Independent to trash the launch and ITs in general.

That was until Fidelity capitulated and announced they (or rather those who invested) would make recurring commission payments to platforms - previously unheard of for an IT. With their palms greased, the newly-converted HL marketing machine was rolled out to persuade us of what an opportunity it was. Dampier kept quiet.

Unfortunately it was a disaster until Bolton was replaced. I believe the commission payment arrangement was ended and the managment fee reduced around the same time.

Albermarle

As such, an investment platform featuring or talking about how they offer ITs, is a defensive measure to retain customers, or to attract customers to whom you can hope to cross sell other services, rather than looking to actually make a lot of money from the customers buying investment trusts per se.

As someone relatively new to platforms and IT's .I always wondered why they charged so little for in some cases even a full SIPP/drawdown service ( even in one case with a generous cashback on top to transfer ) Due to this very good explanation it is now clear that offering IT's or ETF's is largely a loss leader to get you to sign up and hope you then buy into more lucrative products .
Like bookies offering free bets on horse racing in the hope you later get hooked on the casino games.

Aminatidi

jaybeetoo wrote: »

Other platforms don’t think that’s a problem.

Maybe other platforms aren't as big in terms of customer base or don't have the same influence.

I'm simply saying one of the reasons Dampier said they don't include ITs.

masonic

Rollinghome wrote: »

Do you remember when they promomoted the ill-fated Fidelity China Special Situations IT, to be managed by ex-star, Anthony Bolton.

Funnily enough that was the first example that came to mind.

dunstonh

Maybe other platforms aren't as big in terms of customer base or don't have the same influence.

As mentioned, HL are about 3rd or 4th. Big but not the biggest.

HL dominate the DIY market though. They have more then the rest of they DIY platforms put together. I think they are about third in respect of quantity of superclean classes offered.

tin586

Aminatidi wrote: »

Maybe other platforms aren't as big in terms of customer base or don't have the same influence.

I'm simply saying one of the reasons Dampier said they don't include ITs.

The likes of Scottish Mortgage (a constituent of the FTSE 100), F&C, Alliance, City of London have large market caps and are very liquid.

The idea that they would be overwhelmed by the stampeding hordes exists only in HL’s fevered imagination.

dividendhero

tin586 wrote: »

The likes of Scottish Mortgage (a constituent of the FTSE 100), F&C, Alliance, City of London have large market caps and are very liquid.

The idea that they would be overwhelmed by the stampeding hordes exists only in HL’s fevered imagination.

And all were over a century old when Woodford started his ill fated venture

tin586

Prediction: HL will at some point soon see which way the wind is blowing and include a few Investment Trusts in their 'Wealth 50' or whatever else it might be called, with appropriate caveats/warnings (around, for example, special aspects of these, such as share price premium/discount to NAV and liquidity). This would be fair enough (regulatory considerations).



They have form in this regard.

When they introduced a new charging regime in light of the Retail Distribution Review, they tried to charge fees for Investment Trusts as a separate line item from fees for company shares/ETFs (albeit both capped), but then backed down in the face of disgruntled investors.

Also, they never used to include passive funds (trackers) in their favoured funds lists, but now do.



Incidentally, why are they currently including tracker open-ended funds from iShares, but not equivalent ETFs (which are massive and very liquid)? Rhetorical question.



With Dampier (and possibly others) going, HL will re-set. After all, if other platforms can 'recommend' Investment Trusts it's not really that difficult.