£7bn languishes in poor performing investment funds
The twice-yearly ‘Spot the Dog’ report from broker Bestinvest says investors have £7.6bn of savings in funds that have been consistently weak performers.
A total of 34 funds open to retail investors are on the broker’s ‘name and shame’ list. Each fund has underperformed its market benchmark for the last three consecutive 12-month periods and by more than 5% over the entire three-year period.
However, there is some good news: this number represents a 13% decline in funds included compared to the last edition published in February, as well as a continued decline in level of assets (from £8.6bn recorded at the start of the year).
Only one is a UK equity fund – the St James’s Place Equity Income fund – down from the six UK equity funds at the start of 2017. Bestinvest said this is the lowest level since it started reporting the data 20 years ago.
There are no Global Emerging Market funds in the list and notable groups which are entirely absent from the list include Aviva, Artemis, Baillie Gifford, Baring, BlackRock, BMO Global (F&C), Invesco Perpetual, JO Hambro, Kames Capital, Man GLG and Royal London.
Only one Japan fund is on the list (CF Canlife Japan) and even in US equities (usually thought to offer few opportunities for active managers to beat the market) the nine from the last report fell back to six, including Jupiter US Small and Midcap Companies, Henderson US Growth and Cavendish North American.
The biggest pack of dog funds continues to be found across the global equity fund universe, with 17 funds included (up from 16 in the last issue), including Neptune Global Income, Aberdeen World Equity Income and St James’s Place Ethical. However, Bestinvest said eight of these have income generation as part of their target. This is a natural disadvantage because it has left them underweight the soaring US equity market where companies don’t tend to pay high dividends.
UK-listed Aberdeen Asset Management – currently in the process of a mega-merger with Standard Life – headed the hall of shame with over £2bn of assets, representing 27% of the total, across five of its funds. The primary culprit was the firm’s £1.3bn Asia Pacific Equity fund which has lagged the MSCI AC Asia Pacific index by -7% over the three years to the end of June 2017.
In second place with £1.7bn of assets in three funds is advice group St. James’s Place. SJP appoints external fund managers to run its fund and the main offender is its £1bn Equity Income fund, run by boutique RWC, which carries a hefty 1.61% pa ongoing charge.
You can see the full list here: Spot the Dog.
Should investors ditch their dogs?
Bestinvest said there are many reasons why funds go through periods of poor performance and deciding whether to stay invested or switch is all about assessing its future prospects and whether you could do better elsewhere.
It said Spot the Dog is not a fund ‘sell list’, as it is purely based on analysis of past performance which shouldn’t be used as a guide for future performance.
The report stated: “It can also be the case that action is underway to improve performance. For example if a new fund manager with a strong, proven track record elsewhere is appointed or a change of investment approach is now being applied to a fund that has historically underperformed, performance could be turned around.”
“However, funds that appear in it do require further investigation. Unless there are good reasons to believe performance will turn around based on an assessment of its prospects, it may make sense to switch to a pedigree picks fund.”
‘Technical blip or meaningful trend?’
Jason Hollands, managing director at Bestinvest, said: “Pleasingly there are just two ‘big beast’ funds with each having over a billion of assets, with most of the funds in it being pretty small in size. The overall drop in funds hitting our exacting criteria is also encouraging but it remains to be seen whether this is a technical blip or a sign of more meaningful trend coming through.
“The shift to lower cost, commission-free share classes a few years back is likely to have helped reduce the number of underperformers, as has fund consolidation activity. But another technical factor that is likely to be at play here was the rally in the second half of 2016 in stocks that were seen as sensitive to reflation. This bounced which has since faded will have lifted – at least temporarily – some of the more value orientated managers out of the doldrums after a prolonged period where quality growth companies have led the way. The jury is therefore out on whether the industry has really cleaned up its act.”