Hargreaves Lansdown (LSE: HL) shares dropped 8% Friday morning, after first-half attention was focused on the Neil Woodford disaster.
The company lost £2.3m due to waiving platform fees for Woodford’s funds, which is more than Woodford himself did. Woodford continued to charge for his services even while trading in his Equity Income Fund was suspended and investors couldn’t touch their cash. If you think there’s something a bit ethically dodgy there, you’re not alone.
Profits up
The costs of the Woodford debacle didn’t harm Hargreaves Lansdown very much, mind, as the firm reported increased first-half revenues and profits.
Revenue to 31 December grew 9% to £257.9m, with pre-tax profit up 11.5% to £171.1m. The increases were driven by strong levels of assets under management, up 22% at the end of the half to £105.2bn. Growth might be slowing, though. Net new business of £2.3bn in the period was down 9%.
With earnings per share up 12%, the company lifted its interim dividend by 9%, to 11.2p per share.
But the focus is all on Neil Woodford, as more than half of Hargreaves Landsown’s assets under management are in funds. And that’s what its Wealth 50 buy list is all about. Apparently the FCA reckoned (in 2017) that HL’s fund recommendations “were a positive tool for investors and help them to make decisions.”
Not so sure
I have my doubts, as no doubt do those who followed HL and handed over their cash for Neil Woodford to lose. Those investors learned this week that they’re likely to lose 20% or more of their investments with the disgraced guru.
Hargreaves Landsown has been under intense criticism from many in the industry, after it continued to push Woodford’s funds apparently without any awareness of his increasingly risky investing strategy or looming liquidity crisis.
I can see the point (for some investors) of advisory investing services. And I appreciate the value and efficiency of execution-only services. But I get twitchy when I see the boundaries starting to blur.
HL has reviewed its Wealth 50 list, and says it “will be making changes over the coming months to incorporate what we have learned from this research, including a greater focus on transparency of process.”
Fund performance
But I think there’s evidence that investors should simply ignore the list. According to The Sunday Times earlier this month, more than half of HL’s chosen funds produced lower than average returns. Just think about what that means. It means you’d have had a statistically better chance just tossing a coin.
That fits in with my 30+ years of experience in examining returns from shares and funds. The sad truth is that the majority of managed funds tend to underperform the stock market average over the long term. Do a search on “managed funds” and it’s dominated by ads, then by stories about the current best performers. Will the best performers still be the best next year? In five years? In 10 years? Not in my experience.
Anyway, putting all of this aside, would I buy Hargreaves Lansdown shares? On a forward P/E of over 30, no. I’m a customer, I love the company’s execution-only services, but I think the shares are too expensive.