In total, 17 funds with combined assets under management (AUM) of more than £3bn have fallen short of both measures between 2011 and 2013, with the £1.2bn Standard Life portfolio making up the biggest bulk of assets.
Source: FE Analytics
Above are the 10 funds with the largest AUM that have underperformed for at least three calendar years in a row. Most of the funds on the list take the FTSE All Share as their benchmark, but a select few – including Standard Life TM UK General Trust and MFM Slater Recovery – take the IMA UK All Companies sector average.
Of all of the 17 funds, Manek Growth has the worst cumulative record over three years, losing 35.63 per cent compared with a 37.76 per cent gain from the sector average, and a 32.67 per cent gain from the All Share. The £20.6m portfolio has underperformed in five of the last six calendar years.
The next worst is the £448m Henderson UK Alpha fund, which has lost 1.51 per cent over three years.
Manager James Ross says that the fund’s fortunes have changed significantly since he and Neil Hermon (pictured) took it over in early 2013, pointing out that it only underperformed last year because of a poor January.
“2011 and 2012 were very poor periods of performance for the fund, which can largely be attributed to the fund’s overweight exposure to small and mid cap mining and oil and gas companies throughout this period,” he explained. “Neil Hermon and I took over management on 1 February 2013, and since then the fund has returned a net 22.1 per cent against the index’s 15.1 per cent. The improvement in relative performance can be attributed to an increasing focus on high quality mid cap growth companies and a distinct movement away from small and mid cap mining and oil and gas.”
Performance of fund, sector and index in 2013
Source: FE Analytics
“In 2013 the fund underperformed the index marginally. To put this in context, the fund underperformed by 5.2 percentage points in January before Neil and I took over management, and then outperformed by 5.5 percentage points over the remainder of the year.
Ross says the duo remain excited at the prospect of a continuing improvement in the UK housing market, which they are playing through companies such as Grainger, Taylor Wimpey and Countrywide. They also like high quality industrial companies such as Rotork and Melrose.
He says he expects long-term interest rates to increase over the coming years and is positioned in banks such as Lloyds to benefit from this. He is by and large avoiding the consumer staples sector.
Hermon is best known for managing the Henderson UK Smaller Companies fund and Henderson Smaller Companies trust, which both have a strong record compared with their peers and benchmark.
As mentioned previously, Karen Robertson’s Standard Life TM UK Equity General Trust is the largest of the consistent underperformers. The group points out that the fund isn’t designed for retail investors and shouldn’t be compared with its sector, but acknowledges that the performance of Robertson’s £261m UK Equity Growth portfolio wasn't good enough.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
“Standard Life TM UK Equity General Trust was launched in order to provide a mutual fund for retail life unit-linked investment via Standard Life product wrappers and has never been actively marketed as a mutual fund for non-Standard Life investment,” a spokesperson said.
“The fund does not have a risk and return profile consistent with the majority of the IMA UK All Companies sector, so we would suggest it is not relevant to the survey findings.”
“Looking at the UK Equity Growth portfolio, on a three-year view, much of the fund’s underperformance occurred during 2011 when risk-off periods caused by the eurozone debt crisis hurt our more cyclical positions including financials and miners.”
“We held faith in a number of holdings in these sectors, particularly given that defensives looked overvalued with a poor earnings outlook.”
“Our investment horizon is aimed at the medium- to longer-term investor and these stocks rebounded over the course of 2012 and 2013.”
The spokesperson says that the normalisation of markets should suit Robertson’s bottom-up process, pointing out that performance was much improved last year.
Standard Life UK Equity Growth made 24.82 per cent last year, putting it more than 4 percentage points ahead of the All Share; however, this wasn’t enough to outperform the UK All Companies sector average, which Robertson takes as her benchmark.
Robertson currently favours UK consumer cyclicals such as travel and leisure, which she thinks look attractive in terms of growth and continued earnings upgrades. She is avoiding highly rated defensive stocks such as producers of food, drink or household goods, given high valuations combined with earnings downgrades.
Other funds with an excess of £100m under management that have underperformed in each of the last three calendar years include the £352m Kames UK Equity fund, as well as F&C UK Alpha and L&G Equity. Kames point out that the institutional share class of the fund, which has the bulk of investors’ money in it, actually outperformed in 2013.
SWIP was once again prominent on the list with three funds: Halifax Special Situations, Scottish Widows UK Select Growth and SWIP UK Opportunities. The Halifax and SWIP portfolios have been bottom-quartile performers in their sector for four consecutive years.
A couple of high-profile funds came only a whisker away from making the list, including Tom Dobell’s M&G Recovery fund, which protected on the downside only slightly better than its peer group in 2011. It has underperformed the All Share for three consecutive years, though.
Hargreaves Lansdown’s Adrian Lowcock says Dobell has the ability to turn things around, and urges investors to stand by the £7bn fund.
“It has been a tough few years for M&G Recovery as investors’ heightened risk-aversion and preference for ‘quality’ stocks have acted as headwinds,” he explained.
“Dobell’s recovery investment style involves buying out of favour companies and working closely with the management to turn around these businesses. This requires a longer investment term – at least five to seven years – and does mean there are periods when the fund will lag behind the stock market.”
“The nature of active managers is to do something different to the index in order to obtain better returns over the medium and longer term. Dobell has proven he is capable of staying focused on his strategy and achieving this.”
The previous article in the series looked at consistent underperforming UK Equity Income funds.
