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Investors pay £115m in fees for seriously underperforming funds

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Investors in funds which have performed worse than the market have spent £115m in annual fees.

The Bestinvest’s latest ‘Spot the Dog’ report is the firm’s bi-annual name and shame list of seriously underperforming funds available to UK investors.

‘Dog’ funds are those which fail to beat their relevant benchmark over three consecutive 12-month periods and also by 5% or more over the full three-year period (to 30 June 2022). It covers unit trusts and OEICs from a number of Investment Association equity sectors.

Running for three decades, the latest edition includes 31 consistently poor performing investment funds holding £10.7bn of investors’ wealth.

This is the lowest number of funds in six years, and it is down from the 86 ‘dog’ funds highlighted in February 2022. The value of holdings has also fallen from £45.4bn recorded six months ago.

While it has been a difficult start to 2022 amid the market volatility, there are some big names in the latest edition which raises awareness of poor performance and should remind investors to check on their holdings, Bestinvest said.

Three funds in the list have more than £1bn under management and they are all UK-focused funds: Halifax UK Growth, Halifax UK Equity Income and Scottish Widows UK Growth. These funds manage £6.7bn on behalf of investors and have been on the dog list “for so long that underperformance seems entrenched”, Bestinvest said.

It said that while Schroders own-brand funds are largely absent from the list this time, it is a sub-adviser on some of the biggest underperformers from HBO and Scottish Widows including the three listed above.

Jupiter which has been “haemorrhaging assets for years” has three dog funds in the list, totalling £774.7m under management. This is down from the six recorded previously.

Fidelity has just one fund on the list, but it has a lot of assets under its American fund which has lagged the benchmark by 29% over three years – 18% behind its nearest rival on the list.

And it’s “surprising” to see two well-established boutiques featuring heavily in this latest edition, Bestinvest said – Somerset Capital and CRUX. This is because they tend to specialise in one area “and tend to be very good at it”.

The table below includes the top 10 biggest funds:

By contrast, the number of global equity income funds appearing on the list has dropped from 14 to zero, helped by the weakness of growth sectors since the start of the year.

Bestinvest said credit should go to St James’s Place which had six funds last time, but only one now – Continental Europe.

And Asia and smaller companies have been hit hard recently but no smaller companies’ managers and just one Asia manager appear on the list.

Meanwhile, all sectors saw a drop in the number of dog funds. It said that while it aims to identify serial underperformers rather than those that are temporarily out of fashion, it has been tougher for value-orientated funds.

But this flipped in the first part of the year as growth sectors such as technology, communications services and consumer discretionary were hardest hit with investors turning to previously unloved parts of the market and value strategies in particular.

It also lists the ten worst-performing ‘beasts’ overall:

You can see the full Spot the Dog report here.

What should investors do if money is in a ‘dog’ fund?

Jason Hollands, managing director of Bestinvest, the investing and coaching service, said: “While short-term periods of weakness can be forgiven, as a manager may have a run of bad luck or their style may be temporarily out of fashion, there can be more concerning factors at work: important changes in the management team; a fund becoming too big, which might constrain its flexibility or a manager straying from a previously successful approach.

“We have been producing Spot the Dog for nearly three decades in order to raise awareness of the poor performance of many investment funds and to encourage investors to regularly check on how their investments are doing and take action if necessary. While there can be reasons to persevere a little longer with a poor performer – such as a change of manager or outlook – in other cases it may make sense to switch to a different fund with a stronger team and track record.”

He added: “If all this sounds like hard work and you neither have the time or inclination to research, pick and monitor your own selection of funds, then it might be time to consider taking a different approach. Ready-made portfolios – which are managed and rebalanced for investors – are good options to consider and these days they can also be very cost effective too.”

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