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Following the herd on investments can leave you worse off

Following the herd: lists of popular investment funds, published by the largest investment platforms, are powerful sales tools that many investors use to build their portfolios around

Lists of popular investment funds, published by the nation’s largest investment platforms, are powerful sales tools that many investors use to build their portfolios. But an investigation by The Mail on Sunday reveals that investors who bought funds on these listings a year ago are now said to be suffering heavy losses.

Some of the favorite investments this time last year included Scottish Mortgage (down 49%); Baillie Gifford American (down 52%); and Polar Capital Global Technology (down 30%).

Investors who bought preferred stocks a year ago probably didn’t fare any better. Among the most popular stocks bought at this time last year were Boohoo (now down 77%); Asos (down 75%); and The Hut Group (down 61%).

Following the herd: lists of popular investment funds, published by the largest investment platforms, are powerful sales tools that many investors use to build their portfolios around

Following the herd: lists of popular investment funds, published by the largest investment platforms, are powerful sales tools that many investors use to build their portfolios around

To put these numbers into context, the FTSE All-Share Index is down less than 2% over the same period.

The major investment platforms – AJ Bell, Hargreaves Lansdown, Fidelity and Interactive Investor – publish a monthly list of the most popular investments purchased by clients.

These are different from the lists of most bought funds that the platforms also compile, based on their own investment research.

Popular fund lists are used by investors to help generate ideas and inspiration for their own portfolios. But experts warn that taking it into account – even worse, according to them – can cost investors dearly.

Damien Fahy, founder of personal finance website MoneytotheMasses, said: “These favorite fund lists are a marketing tactic that provides the platforms with good media coverage and public relations.

“But, at the end of the day, they encourage customers to invest. It’s similar to the list of most purchased items you might see on a retail website – for example, the likes of Amazon.

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He adds, “On the one hand, they can help generate investment ideas for investors looking to put money into the market. On the other hand, there are pitfalls because of the factors that influence the funds that appear on these lists.

The Mail on Sunday has taken a look at the most popular fund buys on the UK’s biggest investment platforms. If an investor had spread £500 across each platform’s top five funds a year ago, their initial investment would now be worth £412 with AJ Bell; £443 with Interactive Investor; £433 with Fidelity; and £468 with Hargreaves Lansdown.

Stock markets are down during this period, but some of the falls in fund prices are dramatic.

Of the five most popular funds across all four platforms, only one is worth more than this time last year: Guinness Global Energy (up 49%).

Among the top stock picks, only three of the companies’ stock prices are up: BP (41%), HSBC (10%) and Rio Tinto (11%). The numbers are just a snapshot and there will inevitably be times when the most popular funds outperform. Nor can performance be judged solely on one-year results. Nevertheless, annual falls of this magnitude could take years to recover.

Lists look backwards… not forwards

Holly Mackay of investing website BoringMoney warns that the biggest problem with choosing to buy from bestseller lists is that investors make decisions about what to buy today based on what people have bought in the past. She adds that investors tend to jump on the bandwagon and invest in funds that are doing well. When stock markets are steadily rising, such a strategy can work well. But not when the markets are deteriorating or during the kinds of volatile conditions we are currently experiencing.

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Mackay says: “If the markets are moving steadily, these lists can help identify good funds as they are unlikely to change much from month to month.

“Yet if the markets are volatile and the future uncertain, I think a rear-view mirror doesn’t provide the comfort that our brain derives from feeling among the herd. Under such conditions, I would ignore them.

Interestingly, there is little overlap between the most popular investments on the four biggest platforms. This could be explained by the differences between the customers of each platform.

It may also reflect the funds each platform promotes at any given time. The choice of funds to be promoted by the platform may not be the best one for all individual investors.

In addition, you often buy at full price

Investors are used to buying funds and companies that have experienced recent growth and are therefore more expensive than in the past.

They are less likely to seek out dated and undervalued funds. Therefore, investors who decide to go with the flow and buy the best picks from the previous month are likely to buy at higher prices. Mackay points to the Scottish Mortgage investment trust. It was a popular choice last year, but you don’t see it anywhere on bestseller lists today.

“Investors can recoup that confidence for 49% less than they could a year ago,” she says. “So it’s probably a much better time to buy it.”

Heads turned by star managers

Fahy warns that star managers tend to be popular among investors. Fundsmith Equity, led by celebrity fund manager Terry Smith, was the most popular fund choice on AJ Bell, Fidelity and Interactive Investor platforms a year ago.

The fund is up 25% over three years, although it’s down 13% in the last 12 months. Sometimes following a popular manager can pay off, but not always.

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Fahy says: “Remember Neil Woodford’s Woodford Equity Income fund would have been high on those lists and some investors lost a lot of their savings when it was dismantled.”

So should you just ignore them?

Do-it-yourself investors have access to thousands of funds, investment trusts and stocks, all with the click of a button. This level of choice can be intimidating to even the most confident and experienced, so it’s understandable that investors are looking for easy ways to narrow down their choices.

Bestseller lists are a tool investors can turn to, alongside lists issued by investment platforms of their own recommended funds.

Some platforms also publish suggested fund model portfolios suitable for different types of investors. However, while all of these tools can offer insights, nothing really takes the place of your own research to make sure you’re buying the best funds for you.

Jeremy Fawcett, founder of financial consultancy Platforum, suggests that using these tools together can work well.

“Fear of missing out will cause some people to browse lists of top-bought funds,” he says. “Attention-grabbing options can be cross-referenced with best buy lists to check how they are perceived by professional fund pickers.

“It’s not a terrible way to narrow down the overwhelming choice that most amateur investors find a nightmare to manage.”

Fahy adds that if you’re going to look at bestseller lists, at least look at those on a number of platforms — rather than sticking to your own.

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