A total of 37 portfolios have been identified as ‘dog funds’ in Tilney Bestinvest’s latest piece of research, although this is a fall in numbers from the last time the firm identified persistent underperformers.
The ‘Spot the Dog’ report, which is published twice a year, uses a ‘dog rating system’ to identify the funds that investors need to be wary of.
The first filter involves identifying funds that have failed to beat their benchmark over three consecutive 12-month periods and the second filter involves selecting the funds that have underperformed their benchmark by 10 per cent or more over the entire three-year period.
Since the last report, there has been a 38 per cent decrease in the number of dog funds. The number of investment vehicles in the doghouse has dropped from 60 to 37 and between them they manage total assets of £17.6bn, down from £23bn in Tilney Bestinvest’s last report.
The report has also found an identifiable pattern in the funds that have been renegaded to the dog house.
Global equity funds remain the biggest culprits of underperformance, with 13 funds in the Investment Association’s Global Equity Income and Global sectors being named as dog funds.
However, this number has reduced by three since the last report, showing there have been improvements within the sector.
Some of the global funds that have seen the biggest underperformances over the last three years to the end of July include M&G Global Basics, which underperformed its benchmark by 26 per cent, Kennox Strategic Value, which underperformed by 21 per cent, and Aberdeen World Equity, which underperformed by 20 per cent.
Performance of funds vs benchmark over 3yrs
Source: FE Analytics
The most significant underperformer in the sector was Aberdeen World Equity Income, which underperformed its benchmark by 27 per cent and would have provided a return of just £106 over three years from an initial investment of £100.
Aberdeen and M&G are also some of the fund groups that have seen the highest number of underperformers across the board, as well as BNY Mellon, St, James’s Place and Baillie Gifford.
While only two of M&G’s funds have been classed as dogs – M&G Recovery and M&G Global Basics – the group has found itself at the top of the table for underperformance by assets, as they are £7.3bn in size when combined.
While the likes of BNY Mellon, Baillie Gifford and Aviva Investors have only one dog fund in their line-up, they have similarly made it onto the list of top underperformers by assets under management.
Aberdeen, however, currently has the most dog funds at eight, the assets of which amount to £3.3bn.
The report says: “Aberdeen has been one of the dominant forces in Asia and emerging markets investing for some time. However, it seems to be losing steam more recently, with Aberdeen Asia Pacific Equity and Aberdeen Asia Pacific & Japan Equity in the doghouse.”
“We believe this in part reflects the fund’s relatively conservative positioning in companies with strong corporate governance practices and their heavy underweight to China relative to the benchmark.”
The report adds that the fund house is underweight India, which rallied sharply in 2014 following the election of bro-business reformist Narendra Modi as prime minister.
In contrast, boutique house Neptune seems to have put its dog days in the past, having had five funds in the dog house in the last edition but none at all this time.
Other groups that have remained absent from the list of underperformers include Artemis, AXA Investment Managers, Columbia Threadneedle, Liontrust, JP Morgan and Henderson among others.
The areas of the market that have the least number of dog funds are UK equity, European equity and Japanese equity funds, with only one Japan fund, Schroder Japan Alpha Plus, in the doghouse.
Managed by Nathan Gibbs, the £31m fund has been in the doghouse twice previously over his tenure. The manager runs a high conviction portfolio with a bias towards undervalued mid and large-caps, which have proved unpopular over the past three years.
In the UK equity income sector, there are five funds that Tilney Bestinvest believe need to be monitored: Ian Williams and Nick Taylor’s Elite Charteris Premium Income, IFSL Harewood UK Enhanced Income, Tom Dobell’s M&G Recovery, Aberdeen UK Opportunities Equity and Jeremy Whitley’s Halifax Special Situations.
It must be noted that Aberdeen UK Opportunities Equity merged into Aberdeen UK Equity last month.
Performance of funds vs benchmark over 3yrs
Source: FE Analytics
The biggest underperformer is M&G Recovery, which was one of the top performers in its sector several years ago.
“Its descent from pedigree to mutt was swift,” the report said. “We removed it from our top-rated funds in 2013, when its decline seemed irreversible, and other investors now seem to have lost faith as well.”
“The fund has shrunk from a Great Dane-sized £8bn at its peak to a more Labrador-like £4.5bn now. Numbers in recent months suggest M&G Recovery might finally be recovering, and not before time.”
In contrast, Tilney Bestinvest’s pedigree picks in this space are Thomas Moore’s Standard Life UK Equity Income Unconstrained, Fraser MacKersie and Simon Moon’s Unicorn UK Income and FE Alpha Manager Alex Savvides’ JOHCM UK Dynamic.
In the US, the six dog funds that have been called out for their underperformance are all repeat offenders with the exception of Aviva Investors US Equity Income, which has now been closed to new investors.
Funds on the list include IFSL Harewood US Enhanced Income, Miton American, Legg Mason IF Clearbridge US Equity Income and Baillie Gifford American.
However, the report notes that because the US market has delivered such as strong performance in recent years, even dog funds have made money for investors. Over three years, all of the aforementioned funds would have delivered in excess of a £35 profit had somebody invested £100 into them three years ago.
Performance of funds over 3yrs
Source: FE Analytics
Europe has only two funds in the dog house – Aberdeen European Equity and Aberdeen European Smaller Companies Equity. Both of these funds have higher weights in oil and basic materials sectors compared to their peer average and this is likely to have impacted recent performance.
Despite a rallying market in the UK small-cap space over the last year, the report has found that there are an equal amount of dog funds in the smaller companies space as there are in the global emerging markets space.
Standard Life Ignis Smaller Companies and CFIC Octopus UK Micro Cap Growth are on the dog fund list, but SF Webb Capital Smaller Companies Growth has had a notably poor performance over the last three years, and would have lost investors £26 had they invested £100.
“This is a repeat offender, after initially appearing on the list in July 2014,” the report said. “This pug has managed to make a big mess despite its small size, underperforming the index by 58 per cent over three years.”
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
“Peter Webb took control of the fund in mid-2012 but subsequently struggled to sell the fund’s illiquid holdings.”
In global emerging markets, three new entrants have been put into the doghouse: Legg Mason IF Martin Currie Emerging Markets, F&C Emerging Markets and UBS Emerging Markets Equity Income.
The only fund that would have made investors a loss over three years is Legg Mason IF Martin Currie Emerging Markets – however, this would have only been a £1 loss if £100 had been invested.
The fund, which is £17m in size, has been described by the report as a “stubborn Chihuahua” and has underperformed its sector average over five years.
Despite believing that it’s important to highlight the funds that need special attention, the team at Tilney Bestinvest emphasise that the ‘Spot the Dog’ report is by no means a ‘sell’ list.
The team said: “It is important to stress that Spot the Dog is not a list of funds that should be automatically sold, as it is based purely on factual analysis of past performance which is not necessarily a guide to how the fund will perform in the future.”
“Indeed there may be good reasons to believe the future prospects are better. For example, there are many different ways of investing and some funds have distinctive styles or investment approaches that can go through periods that are deeply out of step with the current markets, but could be about to come back into favour.”
“Some managers are better suited to tougher times, others to rising markets. It can also be the case that action is underway to improve performance.”
