The amount of money being run by underperforming funds flagged by Chelsea Financial Services has fallen, although there is bad news for UK equity strategies – including LF Woodford Equity Income. 
Each year, Chelsea Financial Services analyses the three-year returns of Investment Association funds to name and shame the worst performers in its ‘RedZone’.
To be included in the RedZone, funds will have sat in the third or fourth quartile of their sector for the past three discrete years.
In addition, the 10 worst offenders are put into the ‘DropZone’, which highlights the funds that have underperformed their sector averages by the largest amount. This can be seen below.
Source: Chelsea Financial Services
There is a degree of good news in the research – while the total number of funds in the RedZone this year has remained almost exactly the same (standing at 188, compared with 187 in 2018), there has been a significant fall in the total value of underperforming assets.
Last year, the RedZone members managed a collective £94.4bn but this fell to just £66.3bn in the latest iteration of the list.
However, Chelsea Financial Services’ Sam Slator said: “The bad news – for those who tend to stick close to home with their investments – is that the IA UK All Companies sector has 28 funds from its sector in the RedZone: 20 more funds than this time last year and assets in excess of £22.2bn. That's a lot of disappointed investors.”
The second worst performing sector in the RedZone was IA Global, which has 22 funds running £4.6bn of assets on the list. This was three funds fewer and £5bn less than last year. IA Mixed Investment 40-85% Shares came in third place with 13 funds and £3.9bn of assets.
Several well-known names can be found in the RedZone, especially the Invesco Income (UK), Invesco High Income (UK) and Invesco UK Strategic Income (UK) funds run by Mark Barnett as well as Derek Stuart and Andy Gray’s Artemis UK Special Situations fund and Steve Davies’ Jupiter UK Growth fund (which is also in the DropZone).
But Slator drew attention to the fact that Neil Woodford’s LF Woodford Equity Income fund is in the RedZone and has been included in the DropZone for the first time. The fund is the ‘best’ relative performer in the DropZone and is run by one of the best-known managers in the business.
The fund lost 13.13 per cent over the three years to the end of 2018, which is the period covered by Chelsea Financial Services’ research. This makes it one of the worst performing members of the IA UK All Companies sector – only Jupiter UK Growth and Quilter Investors UK Equity Income II (which is also run by Woodford) posted a worst result.
Performance of fund vs sector and index over 3yrs to end of 2018
Source: FE Analytics
Slator said LF Woodford Equity Income’s performance was a “point of contention” in the Chelsea offices. “Some – like myself – have lost patience and are no longer invested in the fund. In my view, there are a number of excellent alternatives available,” she said.
“Others here have more faith in manager Neil Woodford being able to turn his performance around. He does, after all, have a very good, long-term track record.”
The worst performing fund in the DropZone, however, is Close FTSE techMARK. It tracks the FTSE techMARK Focus index but has lagged its average IA Technology & Telecommunications peer because it only covers UK tech stocks, not global ones.
Slator added that there has been a significant amount of change in the 2019 research. “Perennial offender” SF Webb Capital Smaller Companies had a name and mandate change along with a good year, which meant it left the RedZone entirely.
HC FCM Salamanca Global Property 1 – which is another fund another to consistently be put in the DropZone in the past – has asked the FCA for permission to wind up the fund, while two others have had a change of mandate or manager and three have seen a turnaround in performance.
Slator continued: “When it comes to companies, Aberdeen Standard Investments still has a long way to go to sort out the poor performance of its fund offering.
“The group has 20 funds in the RedZone – two more than last year – but at £10.7bn, the value of underperforming assets has at least fallen by a third over the past 12 months.”
Among the group’s funds to be put in the RedZone are Aberdeen Global Technology Equity, Aberdeen Global Emerging Markets Smaller Companies, Standard Life Investments European Equity Income and Standard Life Investments American Equity Unconstrained.
HSBC remains the second worst company in the RedZone research, with eight funds and £2bn of assets. HSBC European Growth, HSBC Balanced and HSBC UK Focus are some of its funds highlighted for underperformance.
Meanwhile, Jupiter has seven funds accounting for £2.2bn of assets in the RedZone, putting it in third place. Jupiter UK Growth has already been mentioned, while Jupiter Distribution & Growth, Jupiter Growth & Income and Jupiter UK Alpha are among those on the list.
Chelsea Financial Services also highlighted Invesco for its underperformance. Although the firm has only six funds on the list, their combined assets total more than £12bn. “It should really be placed second,” added Slator.
The full list of the 188 funds sat in Chelsea Financial Services’ RedZone can be found here.