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The underperforming funds that everyone’s still buying

12 April 2014

Some of the most popular funds over the past 12 months have been ones that have underperformed. FE Trustnet asks the experts whether they are simply having a bad period or if investors should be looking for alternatives.

By Alex Paget,

Reporter, FE Trustnet

Data from FE Analytics shows that investors have been piling into a number of funds that have recently underperformed against their sector and benchmark.

It is often said that private investors are the last to the party and certainly a number of the funds that have attracted the most amount of money over the last 12 months are portfolios that have previously performed very well, but their returns have since tailed off.

We asked the experts whether these funds are simply having a bad period or if investors should be looking for an alternative.

One of the best examples is Jason Pidcock’s five crown rated Newton Asian Income fund.

According to FE Analytics, it has been the sixth best performing portfolio in the IMA Asia Pacific ex Japan sector since its launch in November 2005 with returns of 167.11 per cent and has beaten its benchmark – the FTSE Asia Pacific ex Japan index – by close to 40 percentage points.

The now £4.3bn fund has only underperformed against its sector and index in three calendar years since its launch, however one of those years was 2013.

It lost money last year, which has contributed to Newton Asian Income being the ninth worst performing fund in the sector over a rolling 12 month period with losses just shy of 8 per cent.

Performance of fund versus sector and index over 1yr

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Source: FE Analytics

Over that same period of time, however, the fund has attracted inflows of £760m.

Pidcock recently explained to FE Trustnet that his fund had been hit by the flow of money out of high yielding Asian stocks as the market become more concerned about the impact of the Fed’s QE tapering. 

However, given its now large size, many investors may be concerned that size has begun to impact Pidcock’s ability to manage his portfolio.

Rob Morgan (pictured), pension and investment analyst at Charles Stanley Direct, disagrees with that view. He says that size isn’t an issue at the moment as Pidcock is used to running a lot of money and has the resources to deal with inflows.

ALT_TAG He says that, if investors have bought the fund more recently, then they have been making a good call.

“Asian equities have actually picked up a bit recently, but it was certainly the counterintuitive trade,” Morgan said.

“I can see why investors have been buying this fund, especially at the back end of last year, as it is a fund that has always maintained a good yield. I think it is a very sensible view to buy into the sector which has recently underperformed.”

One fund, however, which has had an unusual spike in AUM has been Scot Widows Emerging Markets.


The fund has attracted £630m over the last 12 months and its AUM currently stands at £847m. However, the fund has only beaten the IMA Global Emerging Markets sector in two out of the last 10 discrete calendar years, underperforming in 2005, 2006, 2007, 2008, 2010, 2011, 2012 and 2013.

While it seems strange that a fund with a relatively poor track record, Morgan says that the reason behind its increased AUM could be because Aberdeen, who are considered to have one of the best emerging market teams, bought Scottish Widows last year.

He says it could be due to the “Aberdeen effect”, with investors wanting a different way to gain access to the team’s sought after expertise.

FE Alpha Manager Stuart RhodesM&G Global Dividend fund, which has been one of the best performing global portfolio since its launch in July 2008, has attracted more than £2.4bn worth of inflows over the last 12 months.

While it has beaten its benchmark over that time, the now £8.5bn fund has underperformed against the IMA Global sector.

Performance of fund versus sector and index over 1yr

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Source: FE Analytics

However, Sheridan Admans – investment research manager at The Share Centre – says this is nothing to be concerned about.

“First and foremost, this is a fund with and excellent track record and a very credible management team,” Admans said.

“The first part of the problem is that Stuart Rhodes has had to deal with massive wall of money coming into his fund which he has to invest somewhere; that is going to affect performance.”

“There can be a lag with these things and if he is caught with a high level of cash when markets are rising, like they have, it’s going to have an impact.”

However, the manager says that as the fund has outperformed its benchmark it shows there isn’t really an issue there.

He says it is a similar situation with FE Alpha Manager Iain Stewart’s Newton Real Return fund, which has only delivered a return of 0.41 per cent over the a rolling one year period, but has attracted £1.2bn which makes the fund’s current AUM £9bn.

He says that as the fund is meeting its absolute return mandate, investors shouldn’t be too quick to write it off.

The UK fund’s that have attracted the most amount of money over the last year have been passives, such as the Blackrock UK Equity Tracker which has grown by close to £2bn over 12 months.

Funds such as Schroder UK Opportunities, Old Mutual UK Alpha and Majedie UK Equity have also proved to be popular.


However, there are a number of IMA UK All Companies funds that have also attracted decent levels of inflows, but have underperformed recently.

The five crown rated Liontrust Special Situations fund, which is headed up by the FE Alpha Manager duo of Julian Fosh and Anthony Cross, delivered top quartile returns in every year between 2008 and 2012, but the fund slipped into the bottom quartile in 2013 and failed to beat the FTSE All Share.

Performance of fund versus sector since January 2008

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Source: FE Analytics

Despite its underperformance last year, £230m has gone into the fund pushing its AUM up to £1.2bn.

Morgan says, however, that the funds relatively poor returns are a function of the Cross and Fosh’s aim to invest in high quality companies being out of favour. Therefore, he says investors who have been buying the Liontrust Special Sits now are making a good call.

“This is the type of fund you want to pick up after they have had a difficult time,” Morgan said.

“Cross and Fosh aren’t going to flip-flop between styles and they are not going to be overly aggressive if the market is rising strongly.”

“Now would be a good time to buy it as investors stand a better chance of outperforming over the long run if they pick it up at low valuations.”

Admans says the same can be said for Adrian Gosden and FE Alpha Manager Adrian Frost’s now £6.7bn Artemis Income fund.

It’s taken on more than £670m over the last 12 months, but has delivered third quartile returns over that time. Admans says, however, that the managers’ preference for large-caps has hindered performance in a market where small and mid-caps have been massively in favour.

Because of that though, Admans says that large caps offer good value and as a result Frost and Gosden’s fund is in a good position to outperform from here.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.