Revealed: Serial underperforming funds that hold £19bn of your cash
The Bestinvest ‘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 December 2022). It covers unit trusts and OEICs from a number of Investment Association equity sectors.
Running for over three decades, the latest edition includes 44 consistently poor performing equity funds holding £19.1bn of investors’ wealth.
These figures are up from the 31 highlighted just six months ago, and the £10.7bn in value. However, it is down on the 86 funds revealed this time last year
Bestinvest acknowledged 2022 was a turbulent and challenging year amid the Ukraine war, soaring inflation, energy prices and rising interest rates.
However, it said: “We will never punish a fund just because markets are going through a rough patch. But it does highlight the misbehaving mutts whose poor performance is more deep-seated than a short-term wobble. Funds in the report have consistently underperformed relative to their relevant market index.”
Jason Hollands, managing director of Bestinvest, said: “This edition of Spot the Dog includes several former high-flyers and once popular funds that have subsequently fallen on hard times. The difference between the best and worst performing funds cannot be explained by fees alone and ultimately comes down to the decisions taken. This underlines the need for investors to be super selective when choosing actively managed funds.”
The UK and UK equity income sectors were home to more serial underperformers than any other area.
Assets in UK equities sectors have risen from £5.5bn to £8.4bn for the UK All Companies sector, and to £3.1bn from £2.1bn for the UK Equity income sector.
Small and mid caps also dragged down performance, while the Global sector was the other weak spot.
While the number of funds increased from nine to 10, the assets in the weakest funds increased from £873.4m to £4.49bn.
The biggest culprits were the £2.2bn St. James’s Place International Equity fund and the £1.8bn Hargreaves Lansdown HL Multi-Manager Special Situations trust. Bestinvest said: “Hargreaves Lansdown use a fund of funds approach to select the managers it believes will perform well, but this approach has not delivered for investors over the past three years.”
These two funds are among six with assets over £1bn which “represents a lot of investors’ savings in funds that should be doing better”, Bestinvest said.
The others listed are Invesco UK Equity High Income (£2.8bn), Halifax UK Growth (£3.2bn), Scottish Widows UK Growth (£1.8bn), and Halifax UK Equity Income with £1.7bn.
Meanwhile, Schroders has the most funds on the list, as it has funds under its own name – UK Multi-Cap Income, European Sustainable Equity and European Alpha Plus – and is the manager of the Scottish Widows branded HBOS funds. This means its total 10 funds add a further £7.5bn in underperforming assets. But Bestinvest noted that these funders were “performing badly long before Schroders got its hands on them”.
Columbia Threadneedle has four funds on the list totalling £185.4m; Abrdn has three funds totalling £545.5m, while Invesco has two, worth £2.96bn.
Small and mid-cap specialist Unicorn has three funds worth £474.7m. Fidelity has two funds on the list this year, with the £753.6m Fidelity American making the list as it has remained 27% behind its benchmark over three years.
Global and growth funds struggle
The worst performers appeared in the global sector where there tend to be the fewest constraints on both style and geography, “leading to some quite niche and specialist approaches – which don’t always work out”.
The FTF Martin Currie Global Unconstrained fund has the unfortunate accolade of being the worst relative performer, with the fund lagging its index by -36% over the three-year period, turning £100 into £91 over the three years.
When it comes to absolute losses, the MI Sterling Select Companies fund left investors with just £63 for every £100 invested over the three years, undershooting the index by 22%.
Elsewhere, Bestinvest noted improved performance for value-focused managers, while growth managers, particularly those investing in technology, have struggled.
Funds out of the dog house
It said there is a lack of smaller companies and emerging market funds on its list “in spite of very difficult years for both asset classes”.
Bestinvest also gave a pat on the head to Jupiter which previously had three funds last time “but doesn’t appear at all in the latest edition”.
“Baillie Gifford avoids the list, even after a tough year for its ‘growth’ style. JP Morgan, BNY Mellon and M&G have all had their unruly canines in the past but are absent from the doghouse this year,” Bestinvest added.
You can download the full Spot the Dog report here.
What does this all mean for investors?
With the end of the tax-year fast approaching, the coming weeks are typically the peak season for investors choosing investments in their ISAs and pensions. Deciding which funds should deserve a place in a portfolio can be mind-boggling for DIY investors, so Bestinvest said its report “can help narrow the field, as investors may consider ditching the underperformers in favour of an alternative.”
However, it said this is not a ‘sell list’ as it’s analysis of past performance, adding that some managers are better suited to tougher times, others to rising markets.
The funds highlighted “require further investigation”. Hollands, added: “Investors need to make sure that each part of their portfolio is pulling its weight, so Spot the Dog acts as an essential resource to help savers assess whether their investments are being hounded by terrible returns. This is not to say that savers need necessarily to switch out of a Dog fund, as there may be changes already in motion to turn things around. But anyone holding a Dog fund, should certainly consider whether to continue holding it or switch elsewhere.”