Asset managers in denial over “dog funds”, says Lowcock

The Bestinvest adviser highlighted Schroder UK Mid 250 as a fund that has consistently failed to address performance issues.

By Joshua Ausden, News Editor, FE Trustnet
Monday July 23, 2012

A number of fund groups are doing absolutely nothing to turn around the performance of their "dog funds", according to Bestinvest’s Adrian Lowcock, who has urged investors to get out of portfolios that consistently fall short of their benchmark.

The number of funds classified as dogs, which the firm defines as those that have underperformed in each of the last three years and by 10 per cent or more over the cumulative period, has risen in the latest rebalancing of the Spot the Dog series, now amounting to one in six of total retail portfolios in the IMA universe.

While Lowcock points to some fund groups that have identified problems and sought to turn around performance, he thinks many are in denial.

"The overall value of assets invested in dog funds has rocketed in the last six months. The report now excludes the initial rebound from the 2008/2009 crisis – unfortunately, there are still some managers who have not woken up to market conditions."

"It is good to see some fund groups have responded to appearing in Spot the Dog and are doing something to address performance."

"But sadly others seem determined to ignore their managers' repeated appearances. Investors simply cannot afford to leave their precious savings languishing in dog funds and wait for the fund managers to do something about it."

SWIP once again tops the list, with £5.98bn of investors’ hard-earned cash in dog funds, followed by Schroders, Fidelity, M&G and BlackRock.

Lowcock points to BlackRock as a group that has addressed underperformance; however, he was less sympathetic about Schroders.

"Former star manager Mark Lyttleton is largely responsible for Blackrock’s appearance at the top end of the list with the BlackRock UK and BlackRock UK Dynamic funds both making an appearance," he explained.

Performance of manager vs peer group

Name	2011 returns (%)	2010 returns (%)	2009 returns (%)	2008 returns (%)	2007 returns (%)	2006 returns (%)
Mark Lyttleton	-8.68	10.23	29	-29.61	9.5	16.91
Mark Lyttleton peer group composite	-4.82	13.52	26.03	-26.61	3.08	14.9

Source: FE Analytics

"Lyttleton had built a successful track record prior to the credit crunch although his performance has subsequently suffered."

"However, BlackRock has done something about it – management of BlackRock UK was handed to Nick Little in February 2012 and Lyttleton recently took a three-month sabbatical, during which time UK Dynamic is being managed by Adam Avigdori."

"However, this is a shocking sixth consecutive appearance in Spot the Dog for Schroder UK Mid 250. This is a clear example of where investors should act and not wait for the group to address performance."

Performance of fund vs benchmark over 3-yrs

ALT_TAG

Source: FE Analytics

"The size of the fund continues to fall – investors could have paid nearly £60m in charges over the last three years for this chronic underperformance," he added.

The issue of fees is one area Lowcock is particularly keen to highlight in the latest rebalancing.

"The amount investors pay to poorly performing managers has almost tripled [since the last study back in February this year], up to £390m per year, with dog-fund managers taking home £1.17bn over the three years they have been underperforming."

"It is hardly surprising investors are concerned about the fees they pay."

While Tim Cockerill, head of research at Rowan Dartington, doesn’t think investors should automatically dismiss a fund based on its three-year record, he thinks this is the maximum period of underperformance that should be tolerated.

"You have to be careful with a three-year track record because there are certain periods where this measure flatters a fund," he explained.

"I think you need a portfolio to be tested across more than one economic cycle, which three years doesn’t necessarily give you."

"That said, three years of underperformance is the sort of time when you should be assessing your choice. The Schroder UK Mid 250 fund has now been habitually underperforming over five years and more, for example."

"There are some investors who are happy the fund has made more than if they’d just put their money in the building society, but if you consistently fail to beat your benchmark, I think you need to regroup."

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cbpower Jul 25th, 2012 at 10:04 AM

I must admit I have given up investing new money in funds due to the charges and the difficulty in measuring their real performance. I still have a lot of historical investments in funds so I still keep an eye on them. What I would like is for all funds to use the same benchmark for example the RPI; this would make it easier for me to compare funds. The volatility of the fund is another important measure and I like the FE risk score system. Alpha and Beta and the manager’s tenure are other important considerations. Certainly the people who run the fund should have no say in the benchmark. I did look at the report and I do not hold any dog funds, but as long as the fund was not too volatile and was making steady progress I would not just sell it because it underperformed some benchmark. I have held some of my funds 15 years and though they don’t shoot the lights out they have continued to go up slowly and steadily and are now some of my best performing funds.

janet Moorby Jul 23rd, 2012 at 10:22 PM

IF the Fund makes a loss the manager should take a hit, all this under the counter stuff is going to bounce in the financial ind, the public have had enough of greed and a lot of heads and jobs will roll, be afraid be very afraid.

Theo Jul 23rd, 2012 at 02:36 PM

It is odd to read here of Best Invest's surprise that investors remain in dog funds, because in their report they say one should not automatically get out of them, as there could be special circumstances. A perfectly confusing statement.

Also the BI dog fund report comes out months after the end of the measuring period, and by then different data apply. TN and the industry make sure they further confuse the issue by the use of rolling periods which change every day, rather than calendar years. Further more, TN does not give the same performance data for indices as it does for funds, so assessment is no easy task.

Finally, the Schroder UK Mid 250 fund with £1,147 under management is raking in £17.2 mln clear profit after expenses. It takes a good gold mine to match that. Why should they give two hoots for the Investor or for what BI is saying?