The underperforming investment funds holding £46bn of your wealth
The amount of UK investor money in serial underperforming equity funds has reached a staggering £46.2bn. Has your fund made it onto the ‘name and shame’ list?
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 that fail to beat their relevant benchmark over three consecutive 12-month periods and by 5% or more over the full three years analysed (to June 2023). It covers unit trusts and open-ended investment companies (OEICs) from a number of Investment Association equity sectors. It doesn’t include investment trusts or investment companies due to their discount and premium mechanisms.
Running for over three decades, the latest edition includes 56 consistently poor performing equity funds holding £46.2bn of investors’ wealth.
These figures are up from the 44 highlighted just six months ago, and more than double the £19.1bn in value since the last ‘Spot the Dog’ report published in February.
Bestinvest said that global stock markets enjoyed a better start in 2023 following a dismal 2022, but gains have been centred on megacaps which have benefitted from the emerging artificial intelligence trend.
As such, more funds have entered the doghouse, particularly those in the global sector. But Bestinvest’s report isn’t to name and shame those funds that are going through a period of turbulence. Instead, it highlights those funds with poor performance which is “more deep-seated than a short-term wobble”.
As legendary investor Warren Buffett once said: “It is only when the tide goes out that you learn who is swimming naked.”
Worst performing funds: The misbehaving mutts
The global sector included 24 funds which made it into the doghouse, and they account for around three-quarters of the total in terms of assets at £32.14bn.
Within this, St James’s Place has three funds accounting for £26bn of the total: Global Equity (£11.47bn), Global Growth (£7.49bn) and International Equity (£7.09bn).
Bestinvest said given these funds are managed on an outsourced basis and the group can theoretically look across the market for the best options, “this performance will be all the more disappointing”. “It’s also a lot of hard-earned savings that could be doing much better”, the report stated.
St James’s Place funds had three of nine funds with more than £1bn of assets, but in total it has six funds (£29.3bn) which have been flagged as poor performers, accounting for 63% of the total dog fund assets. The others include its appearance in the European sector with its Greater European Progressive and Continental European funds, and in the emerging markets sector with its Global Emerging Markets funds.
Tom Beal, director of investments at St. James’s Place, said: “It’s important to note that the performance of these funds is inclusive of our single ongoing charge which includes the cost for the external fund manager, administration and advice.
“We continually monitor, review, and update our investment proposition to make sure we’re delivering the right outcomes for our clients. In the past two years, four of the funds mentioned have undergone a change in manager and performance benefits of these changes will take time to filter through.
“80% of SJP clients hold funds in a portfolio of funds, to help them meet their goals. Diversification is a key benefit of investing in a portfolio, giving a smoother exposure to the ups and downs of markets.”
The next highest fund group – Artemis – has just under 6% with £2.66bn in underperforming funds, while Scottish Widows has £2.1bn and Columbia Threadneedle stands at £1.92bn while abrdn accounts for £1.67bn.
Bestinvest noted it was surprising to see star stockpickers Artemis on this list, particularly its two US funds – North America and North American Smaller Companies. “The problems appear idiosyncratic and down to a few difficult stock decisions – notably an underweight in Apple, Nvidia and Tesla, plus a holding in now defunct First Republic Bank”, it stated. The £286m Artemis Global Select fund is also on the list amid the departure of the co-manager and manager later this year.
When it comes to HBOS and Scottish Widows (part of Lloyds Bank and managed by Schroders) which have in the past featured on the list, this time round there were only two funds – the Scottish Widows UK Growth and UK Equity Income funds. “While this still accounts for £2.1bn in assets, it feels like progress”, Bestinvest wrote.
Schroders did however have issues with its European and European Sustainable Equity funds, while its European Alpha Plus has fallen off the list “but it still suggests difficulties with the group’s approach”.
While bigger groups dominate the list, a number of specialist, boutique investment managers also have funds on the list. Emerging market specialist Somerset Capital “has had a poor run”. It manages funds under both its own name and for St James’s Place and the two funds appear on the dog list this year. Lindsell Train’s US fund has also struggled, alongside the Trojan Income fund.
However, funds that deserve “congratulatory woofs” include BNY Mellon and M&G who dodged the list, while Baillie Gifford had just one fund while both Schroders and Fidelity “have worked to bring to bring some of their errant pooches into line”.
Other sectors have also been praised, including Japan, smaller companies and emerging markets which have just one or two dogs, “showing that active fund managers will often do best in the less-researched parts of the market”. There were also no global equity income funds on the list this year, as dividend investing has revived.
You can see the full list of funds via the Bestinvest Spot the Dog link.
Are dog funds a ‘sell signal’ to investors?
Bestinvest said every fund manager will have moments of weakness, and they may have a bad run or their style may be temporarily out of fashion.
In this latest edition, the firm said it is clear that managers focusing on quality stocks have been out of favour.
Jason Hollands, managing director of Bestinvest, said Spot the Dog helps investors take stock of their portfolio.
“The purpose of the guide is to encourage investors to keep a closer eye on their investments, not only to check how their investments are performing but also to assess what action is required and when.
“The fund management industry has become increasingly competitive over the past couple of decades with more players in the market and fund managers needing to perform exceedingly well just to be average. For investors choosing to invest in actively managed funds, finding managers with the skill to deliver superior returns is vital if they are to justify paying the fees to be invested in those funds. With many fund managers failing to achieve this over the long term, Spot the Dog identifies the funds that require special attention because they have consistently performed particularly badly against their benchmark.”
Hollands added: “Of course, every fund manager will go through weaker periods – whether that is a run of bad luck, or they are sticking to a style or process that may be temporarily out of fashion. Identifying whether these are short-term or structural factors is key and investors should ask some questions before deciding to stick with a fund or switch.
“Things to consider include whether a fund has become too big, which might constrain its agility, or if there have been subtle but important changes in the management team. Also, is the manager straying from a previously successful approach or are they now too burdened with additional responsibilities?”
Bestinvest also added that Spot the Dog is not a list of funds that should be sold automatically, as it is
based purely on factual analysis of past performance which is not necessarily a guide to how a fund will
perform in the future.
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. So, Spot the Dog is not a ‘sell’ list. However, funds that appear in it do require further investigation.