More needs to be done about flagging up consistently underperforming funds, according to Bestinvest’s Adrian Lowcock, who says that groups and advisers that do little or nothing about their poor record are giving the industry a bad name.
His comments come in light of an FE Trustnet
study that found 24 funds
in the IMA unit trust and OEIC universe have kept faith with a manager who has led the portfolio to consistent underperformance.
The group of funds – including two that have more than £1bn assets under management (AUM) – have fallen short of their sector average over one, three, five and 10 years.
The study only included actively managed funds and discounted those that are headed up by a team or that sit in the IMA Specialist or Unclassified sectors.
"We’ve always said that funds shouldn’t be sold just on three- or five-year underperformance, as long as the fund group identifies exactly where they’re going wrong, and keeps the investors informed," commented Lowcock.
"Whether that means replacing the manager or changing the process is a matter of debate, but there’s no doubt that there are a lot of funds out there that aren’t doing a lot about their record."
A number of the portfolios are bottom-quartile in their respective sectors over at least two of the four time periods, including: the £101m JPM Asia fund, which has been headed up by Edward Pulling
since 2000; the £399m Scottish Widows High Reserve
fund; and Stephen Hall’s
SWIP Japanese fund.
Commenting on the underperformance of the High Reserve and Japanese funds, a spokesperson for SWIP said it is currently reviewing its entire equities strategy, with the intention of making it less regionally focused.
However, the group declined to comment on any one individual manager.
"We believe there is a greater demand for a global approach to investment solutions and as such our repositioned equities team will reflect this," the spokesperson said.
SWIP was unable to confirm that any specific funds will be merged or closed.
In reference to the High Reserve fund, the spokesperson added: "It’s a hybrid fund split around 70:30 UK equities to credit."
"Over the three- and five-year periods the credit element of the portfolio has outperformed its benchmark, the GBP iBoxx Corporate & Collateralised index."
Performance of funds vs sectors over 10-yrs
Source: FE Analytics
Scottish Widows High Reserve is among the two worst-performing funds in its IMA UK Equity & Bond sector over five- and 10-year periods, with returns of 35.05 and -12.31 per cent respectively. It is bottom-quartile in its sector over one, three, five and 10 years.
JPM declined to comment on the performance of the JPM Asia
Lowcock added: "You do have to be careful and look more closely at performance – it could be that a fund has had one absolutely terrible year, which has an impact on all the time frames."
"However, if you’re a good active manager, you wouldn’t expect to see underperformance across the board."
While a handful of funds have seen their long-term track record badly affected by a poor 12-month period, the vast majority have underperformed their sector average in at least six of the last 10 calendar-year periods.
£139.3m Henderson UK & Irish Smaller Companies
fund, for example, has underperformed in eight of the last 10 calendar years.
Year-on-year performance of fund vs sector
Source: FE Analytics
|Henderson - UK & Irish Smaller Companies
|IMA UK Smaller Companies
Commenting on the underperformance of the fund, Richard Acworth, head of corporate communications at Henderson, said: "We do things a little differently from our peer group; while we are benchmarked to the FTSE Small Cap (ex IT) index, most of our peers are benchmarked to the Hoare Govett Smaller Companies index, which has a much higher market cap."
, who joined Giles as co-manager of the portfolio in September 2010, added: "There is a great tendency to think that because our asset class has not performed as well that it never will do."
"However, we remain confident that that is not the case and a disproportionate return is available."
"In spite of the macro backdrop the increasing level of takeovers suggests that on a sensible investment horizon trade and private equity will take advantage, which bodes well for us."
Lowcock believes a lot of responsibility in protecting clients falls to IFAs and pension providers, who don’t put enough pressure on fund houses.
"It’s very difficult to tackle this from a regulatory view point," he said.
"A lot of these funds are held by pension investors who don’t even know what they’re holding."
"In spite of all their powers, large pension providers aren’t putting enough pressure on these groups to explain underperformance and aren’t making the changes that need to be made."
"This is outrageous, given that this is essentially what they’re paid to do."
Danny Cox, head of advice at Hargreaves Lansdown, is of a similar opinion.
"The nature of a lot of these long-standing insurance company funds means it’s difficult to get your money out, but a degree of blame certainly has to fall on IFAs who aren’t moving investors’ money around," he said.
"If a fund is underperforming you’d expect money to be migrating into better portfolios, but if the IFA isn’t flagging it up there’s little to encourage [fund] houses to do anything about [poor performance]."
Cox thinks that the vast number of fund launches in recent years has added to the problem.
"If you look at the US, there are far fewer funds with far more money in them, so they have nowhere to hide."
"A fewer number of funds in the UK would be a big help, but I can’t see this happening – certainly not for a long while anyway," he finished.
For a full list of the 24 funds, please click here.