Our data shows that 23 funds have fallen short of the base rate’s 26.8 per cent return, which is slightly less than the return an investor would get in a savings account, over a 10 year period.
The funds have combined assets under management (AUM) of almost £7bn.
The list of funds is dominated by those with a focus on Japan and property – two areas that have struggled significantly in recent years.
However, all of the funds in question with the exception of the £1.9bn Henderson UK Property fund are bottom quartile performers over the period, and all with a recognised benchmark have underperformed.
The largest three are all property funds: Henderson UK Property, Aviva Investors Property Trust and Hermes Property.
The study doesn’t include money market funds.
Source: FE Analytics
Other funds on the list range from those in the IMA UK All Companies sector, with Manek Growth somehow losing money over the period even though the FTSE All Share made 132.86 per cent, to the IMA Mixed Investment sectors.
The £666m AXA Defensive Distribution and £70m Aberdeen Multi Manager Multi Asset Distribution portfolios have both returned just over 24 per cent since August 2004.
One gold equity fund – CF Ruffer Baker Steel Gold – also made the list.
Despite making more than 300 per cent between 2008 and 2010, a disastrous three years or so has sent it back below cash.
A fund on the list that may surprise investors is Legg Mason Japan Equity – one of the best-performing funds in the entire IMA unit trust and OEIC universe more recently.
Hideo Shiozumi’s fund has proven popular with investors looking for Japanese exposure in recent years, seeing assets under management more than double to £257m.
However, it’s a fund that’s clearly not for the faint heated. It lost close to 80 per cent between 2006 and 2008, and is still well short of cash over a 10 year period as a result.
Shiozumi has run the fund throughout the 10 year period.
Performance of funds and indices over 10yrs
Source: FE Analytics
Mike Deverell, investment manager at Equilibrium, says that beating the base rate is the absolute basic requirement of any fund manager.
He points out that investors can put their money in an instant-access cash ISA yielding much more than a savings account.
Indeed, the picture is much bleaker when looking at funds that have underperformed cash-plus indices.
Deverell says that the Libor 3m +1% index is a reasonable measure of the average cash ISA.
“At the moment you can get 1.5 per cent or so on an instant cash ISA, and so this is a good starting point,” he said.
According to FE data, the index has returned 44.5 per cent over the past decade.
The number of funds underperforming cash swells considerably when using this measure to 69, with total underperforming assets rising to more than £12bn.
The focus of the funds is also much broader.
The list of 69 includes a handful of US and global funds including Legg Mason US Equity and Legg Mason Clearbridge Growth, as well as a number of bond and absolute return funds such as M&G Short-Dated Corporate Bond, JPM Global ex UK Bond and SWIP Defensive Gilt.
Performance of funds and indices over 10yrs
Source: FE Analytics
Deverell (pictured) says that every fund has to be measured on its own objectives. For example, the M&G Short-Dated Corporate Bond had a disastrous 2008, but aside from that has served investors looking for slow and steady returns in excess of inflation very well.
He adds that certain funds have made changes to management in recent years in an effort of turning round performance.
A good example of this is the £555m Henderson Sterling Bond fund, which has been headed up by FE Alpha Managers Stephen Thariyan and Philip Payne since 2009.
A very poor period during the financial crisis, resulting in losses of more than 40 per cent, still weigh heavily on long-term performance, but the fund has performed very strongly under the new team.
Performance of fund and indices over 5yrs
Source: FE Analytics
Henderson UK Property is another example, as it prioritises uncorrelated returns and income above all else.
Its performance has improved significantly since new managers took over in 2009.
However, more cynically, Deverell thinks certain funds are being kept open in spite of poor performance for the wrong reasons.
“On the whole, funds that do really badly tend to close. The figure would be a lot worse if they were included,” he said.
“They close more because there is no money in them. The ones that stay open tend to have quite of lot in the way of assets, and the cynical side of me tells me this is why they are still open.”
“In many cases it’s the bigger institutions that keep the funds open. Some of the money has come from products that have been bought by clients and IFAs who have never revisited them, particularly if they are attached to a life or pension contract.”
Deverell thinks there should be stricter measures to ensure that perennial funds aren’t closed or merged into new products – especially when the groups are making no effort to turn around performance.
However, he says that a lot of the responsibility has to come down to the individual.
“It’s very difficult to say what should be done, but if a fund group isn’t demonstrating that it’s committed to improving performance, these funds should be highlighted,” he said.
“A lot of the AUM is legacy money, and often [the funds in question] have high charges.”
“One thing we do see from a lot of our clients though is an unwillingness to sell out because they don’t want to crystallise losses. That is absolutely not the way to invest.”
For a full list of the funds that have underperformed the various indices stated in the article over a 10 year period, click here.
