Jason Hollands (pictured), managing director at Bestinvest, says many investors put up with weak fund performance because they either do not monitor their investments regularly, receive poor service from an adviser who originally recommended the investment or just because of inertia.
To help investors identify the main culprits here, Bestinvest has published the latest edition of its Spot the Dog report, which flags up the funds that have turned in some of the worse performance of their sector over recent years.
“The differences in performance between funds within the same sectors can vary enormously, so it is vital to be very selective when making your choices,” he said.
“However, in recent years rising stock markets which have been supercharged by massive central bank stimulus programmes have helped mask the poor relative results delivered by many fund managers whose portfolios have been lifted with the overall tides.”
“For unsuspecting investors, rising six monthly valuation statements may have given the superficial impression of a job well done. But the reality is that the fund manager may have seriously lagged the overall movement in the market, detracting rather than adding value while earning lucrative fees.”
In this list Bestinvest “names and shames” those funds that have have underperformed for three consecutive years and by more than 10 per cent over the three years in question.
UK
In the UK equity space it is pertinent that no funds in the IA UK Equity Income sector made it onto the list, given the strong demand for income-paying assets over recent years.
But the largest and best known fund from the IA UK All Companies sector on the list is the £5bn M&G Recovery fund, managed by Tom Dobell.
Its three-year performance shows an 8.5 per cent gain compared to the sector average of 42.91 per cent and a gain in the FTSE All Share of 37.04 per cent.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
The fund is no stranger to the list, having made its first appearance in 2014 following a torrid few years that saw it underperform its peers, leading the manager to apologise to investors.
However, it is one of the funds to make it onto another list – the most popular list of funds FE Trustnet readers are eyeing up to buy this year.
The longer term track record is much better with Dobell still top quartile since becoming manager in 2000, leading several commentators to say the fund’s growth to £7bn in size is the its greatest headwind.
Other funds to make the Spot the Dog list include Aberdeen UK Opportunities Equity – a former SWIP fund - F&C UK Alpha, Santander UK Growth and Allianz UK Mid Cap.
There are also several IA UK Smaller Companies that have made the dog list including Majedie UK Smaller Companies, Jupiter UK Smaller Companies, Artemis UK Smaller Companies and Aberdeen UK Smaller Companies Equity – another SWIP acquisition.
Global
The global sector stands out as the worse peer group in terms of the number and proportion of assets in the sector that meet Bestinvest’s definition of a dog, with 19 funds representing 15 per cent of the universe categorised as persistent underperformers.
One of the best known is the £2.5bn M&G Global Basics fund, managed by Randeep Somel. While the manager has only been at the helm for half of the past three years his performance since November 2011 has been broadly the same as its three-year record, flat.
The sector average as well as the MSCI World index have, however, made decent returns of 38.17 per cent in the case of the sector and a gain of 51.73 per cent in the index.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
This puts the fund in the bottom quartile over one and three years.
Other well-known and big funds to make the list include Newton Global Higher Income, Baillie Gifford Global Income Growth and BlackRock Global Income – which all sit in the IA Global Equity Income sector.
Europe
While top of the news agenda thanks to this week’s launch of a much-anticipated QE programme by the European Central Bank, four funds have made it onto the list of dogs in the Europe ex UK space. The previous list in June 2014 contained none.
Two come from Neptune: the £500m Neptune European Opportunities and £1.7m Neptune European Income funds. Both are managed by FE Alpha Manager Rob Burnett. They are up 27.13 per cent and 34.43 per cent respectively.
However, this is significantly less than the IA Europe ex UK sector average of 45.72 per cent and a gain in the MSCI Europe ex UK index of 43.03 per cent.
Performance of funds, sector and index over 3yrs
Source: FE Analytics
In both funds the manager has been overweight financials over this period, believing the continent’s battered banks are cheap. This part of the index has rallied hard over the past three years but has slowed down over the past year, compared to the wider market.
Burnett’s overall positioning has been for a recovery in the eurozone recovery, meaning performance has been held back when this failed to come through and investors preferred more defensive assets.
The other European funds in the doghouse are the Aberdeen European Equity and HSBC European Growth.
North America
The US equity market is well known as a place where active managers struggle to add value, with the number of investors and managers preferring a passive fund for exposure growing last year.
As Hollands notes, especially with the S&P 500 index reaching a record high this year, few managers have outperformed. He said “a staggering 20 per cent of funds in the sector have been identified as outright dogs”.
“Managers were caught on the hop by its rise and had been expecting corrections which never happened,” he added. “We have sympathy for their predicament but it is easy to see why many investors switched to index tracking funds for their US exposure.”
Those that made it onto the list include Fidelity American, Miton American, Investec American, Baillie Gifford American, Legg Mason US Equity Income, Smith & Williamson North American and Cavendish North American.
