Funds with combined assets under management of £8.6bn are letting investors down by “seriously underachieving” in the past three years, according to research by Bestinvest, with the global sectors being the area where the most funds are failing to live up to expectations.
The group’s Spot the Dog report aims to name and shame consistently poor-performing investment funds by looking for those that have failed to beat their relevant benchmark over three consecutive 12-month periods. The latest edition looks at performance up to 31 December 2016.
In order to be classed as a ‘dog’ in the study, funds also have to underperform their benchmark by 5 per cent or more over the full three-year period examined. This threshold has been lowered from 10 per cent to account for the fact that only commission-free share classes are now analysed.
Performance of sector vs index over 3yrs to end of 2016
Source: FE Analytics
Overall, the latest Spot the Dog labels 42 unit trusts and OEICs as ‘dogs’, down from 54 when the research was carried out 12 months ago. Together these funds run £8.6bn – although this represents a big drop from the £18bn of ‘dog’ assets in the last edition of the report.
The IA Global sector, which is one of the most popular in the Investment Association universe, and the IA Global Equity Income sector are where the most underperforming funds are found; the Spot the Dog report highlights 16 funds – or 15 per cent of the sector – as having performed particularly poorly over the past three years.
As the chart above shows, the average IA Global fund has lagged the MSCI World index by a wide margin over the three years to the end of 2016. Its 35.78 per cent total return is 14 percentage points behind the gain made in the index.
Bestinvest noted: “Active managers have to navigate many pitfalls in the global sectors – as well as stock calls and investment styles going in and out of fashion, global managers have to contend with picking the right mix of regions and big swings in currencies.
“US equities and the dollar strengthened in 2016 punishing managers who were underweight the region. 16 funds find themselves impounded this time and a number were particularly hurt on a relative basis by their geographical allocation – we’ll leave you to decide how much sympathy you give such managers.”
The table below shows the 16 global equity funds that have been flagged up by the report, along with their three-year total returns and their performance in 2014, 2015 and 2016.
Source: FE Analytics
GAM International Growth & Value tops the table after turning an initial investment of £100 into just £119 over three years and lagging the benchmark by 22 percentage points over this period.
The fund is managed by Ali Miremadi, Cato Stonex, Mark Evans and Robert Smithson. It focuses on companies exposed to major growth trends such as consumption growth, changing diets and monetising media content but will only invest if stocks are good value for money.
The £434m portfolio is overweight Europe ex UK and underweight the US, which will have hampered performance over recent years given the relative performance of these two regions.
At the other end of the spectrum, Bestinvest highlights three funds from the sector that it says are ‘pedigree picks’: Fundsmith Equity, Old Mutual Global Equity and Newton Global Income. Of these, the £9.2bn Fundsmith Equity fund – managed by FE Alpha Manager Terry Smith – comes out on top after making 82.88 per cent over three years on the back of a focus on the US and quality growth stocks.
When it comes to UK equities, only six from the 224 funds in the universe have been labelled ‘dogs’. These are Legal & General UK Alpha, Schroder UK Mid 250, Standard Life Investments UK Opportunities, Cavendish UK Select, Aberdeen UK Equity and Aberdeen UK Equity Income – all of which have made 10 per cent or less over the three years in question.
“2016 was a year of change for UK equity markets, dominated by the vote to leave the EU and the slide in the value of sterling. Against this backdrop large international FTSE 100 companies led the way, outperforming medium-sized and smaller companies for the first time since 2011,” Bestinvest said.
“Fund managers also moved away from the more defensive areas that have dominated the UK equity investment landscape over the last few years, an early sign that the tides are beginning to turn. With oil and miners leading other sectors by a large margin, it is not surprising the number of funds in the kennel has risen.”
Performance of best and worst UK performers in the Spot the Dog report
Source: FE Analytics
However, there were five funds in the ‘pedigree pick’ categories, with three-year returns ranging between 24 per cent and 37 per cent. Hugh Yarrow’s £1.5bn Evenlode Income comes in top with a 37.4 per cent total return; it is joined by Liontrust Special Situations, JOHCM UK Opportunities, Threadneedle UK Equity Income and Majedie UK Equity.
The report also looks at the asset management houses with the most funds in the doghouse and there were some big changes on this front.
In the previous edition, M&G Investments accounted for 60 per cent of the total underperforming assets but not a single fund managed by the group appears in the latest instalment. This means three of its flagship funds – M&G Recovery, M&G Global Basics and M&G Global Dividend – have escaped the list.
Bestinvest added: “In fact, no single fund group dominates the hall of shame, in terms of either the number of funds included or the level of assets. Aberdeen has the most number of funds (four). Schroder has the largest level of assets, but this is due to the inclusion of one large fund.”
Aberdeen’s UK Equity and European Smaller Companies funds are “repeat offenders” for inclusion on the dog list, the report notes, while UK Equity Income fund has just joined them; all three are managed by the pan-European equity team. Its North American mandate is also found on the list.
Schroders has just one fund on the list, but it’s the £1.2bn Schroder UK Mid 250 fund. Reacting to the report, Schroders said: “Our funds are managed for long-term performance to assist our clients in meeting their future financial goals.
“During this time we recognise that there will be periods of short-term underperformance. It is important to note that over a five-year period the Schroder UK Mid Cap 250 fund is up 110.4 per cent and ahead of its benchmark and the sector average which returned 70.1 per cent.”
The report also points out that several groups join M&G in not having a fund on the list and some of the notable ones include Aviva Investors, AXA, Artemis, Baillie Gifford, Baring, BlackRock, BMO Global, First State, Invesco Perpetual, JO Hambro, JP Morgan, Kames Capital, Liontrust, Man GLG, M&G, Old Mutual and Royal London.