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Number of serially underperfoming funds soars

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28/09/2015
The number of consistently underperforming investment funds has soared by 96 since May to 239, according to the latest RedZone report from Chelsea Financial Services.

UK investors now have £101bn languishing in so-called RedZone funds, up from £48bn in May.

The RedZone report names and shames the worst-performing funds over the past three discrete years, with each fund in the list producing third or fourth quartile returns each year.

The firm said these increases represent a “worrying indication consistent underperformance is on the rise”.

UK equities, particularly trackers, fared the worst since May, with 44 funds in the UK All Companies sector (holding a cumulative £36.6bn in assets) appearing in the list of serial underperformers.

The number of trackers in the RedZone increased from 20 to 27.

The Global sector was second worst with 25 funds featured (£6.97bn) and UK Equity Income third with 14 funds (£7.68bn).

Aberdeen Asset Management has the largest number of underperforming funds in the RedZone of any fund house with 21, suggesting problems following its purchase by Scottish Widows are ongoing.

Darius McDermott, managing director of Chelsea Financial Services, attributed this to Aberdeen’s reliance on passive strategies.

“It’s almost impossible for Aberdeen to influence the total returns of the passive funds as they have no say over the pricing of the product. All they can do is track the market and hope for the best,” he said.

The DropZone

The report also contains data on funds that have underperformed their sector averages by the largest amount over the past three years. The table below illustrates these findings:

Rank Fund % underperformance from sector average*
1st SF Webb Capital Smaller Companies Growth 88.43%
2nd HC FCM Salamanca Global Property 69.23%
3rd Elite Charteris Premium Income 39.18%
4th S&W Ilex Income 38.48%
5th TM Progressive UK Smaller Companies 38.21%
6th M&G Recovery 35.45%
7th Aberdeen European Smaller Companies Equity 34.19%
8th Aberdeen World Equity Income 32.39%
9th Sanlam Global Best Ideas 30.54%
10th TU Unit 29.65%

*Based on three-year cumulative performance

Underdogs flourish

Of the 30 Investment Association sectors assessed, 28 have produced overall returns for investors, with small caps topping the bill. Funds invested in the UK Smaller Companies sector produced an average return of 62%. Global Emerging Markets and Global Emerging Market Bonds are the odd ones out, delivering -4.87% and -7.59% respectively.

Templeton had both the best and worst performing funds in the IA Global Emerging Markets sector; Templeton Global Emerging Markets lost 25.83% over the three years, while Templeton Emerging Markets Smaller Companies increased in value by 28.90%.

Legg Mason performed the best, with two of their funds (Japan Equity and Opportunity) featuring in the top three performers identified by the report.

“Smaller companies (with the exception of the Webb Capital fund), all over the globe, really have been the place to be over the past three years. It’s a theme that runs through every part of this data,” said McDermott.

“While it’s easy to knock passives, the difference between good and bad active management is worth highlighting. Take the IA Asia ex Japan sector, for example. The worst fund, Tiburon Taipan, lost 10.97%, whilst the best fund, Elite Rated JOHCM Asia ex Japan Small & Mid Cap, returned 49.74%. On a £15,000 ISA investment that’s the difference between having a savings pot today of £13,354 or £22,461.”

To see a full list of RedZone funds, click here.

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