The amount held in underperforming funds has surged to £54.6bn – the highest on record – as the number of lagging UK equity funds soared during the past six months, according to the latest edition of Bestinvest’s ‘Spot the Dog’ list.
The number of funds to be flagged by the biannual study rose by 91 per cent over the past six months to 111, up from just 58 halfway through 2018; a year ago there were just 28 funds that made the list.
The surge in dog fund assets comes after a difficult year for markets, which were challenged by rising interest rates in the US and the withdrawal of liquidity as well as escalating trade tensions between the US and China.
The Spot the Dog study lists funds that have underperformed a representative benchmark for three consecutive 12-month periods while a second filter that identifies funds that have underperformed by 5 per cent over a three-year period. 
“In each market the difference in return between the best and worst performing funds is huge,” said Jason Hollands (pictured), managing director at Bestinvest.
“These differences in fortunes cannot be explained by variations in fees but come down to the decisions taken by the managers as to which companies to invest in. It is therefore vital for investors to choose their funds very carefully.”
From a top-down perspective the worst performing group was Invesco Perpetual, which had £13bn spread across seven underperforming funds. These include Mark Barnett’s £7.8bn Invesco High Income (UK) fund. It is the second consecutive edition of the list in which the group has topped the list.
Fund groups with the most held in underperforming assets
Source: Bestinvest
A surprising new addition to the list of top underperforming groups is Neil Woodford’s Woodford Investment Management, which has found itself in second place due to the inclusion of £4.9bn LF Woodford Equity Income fund for the first time.
In third place is Columbia Threadneedle with six funds – accounting for £4.6bn of dog assets. This has seen the group climb from 10th place in the last Spot the Dog.
Another climber was Artemis, which rose from ninth to fourth place, with two funds – Artemis UK Special Situations and Artemis Global Income – making the list. Rounding out the top five is St James’s Place – “a regular name in Spot the Dog” – which has four externally managed funds appearing on the list.
The rise in dog fund assets has been largely attributed to an increase in underperforming UK equity funds, which now counts 59 funds (H1 2018: 23), representing £35.9bn in assets: 32 from the IA UK All Companies sector, 25 equity income strategies and two smaller companies funds.
The ongoing Brexit negotiations have taken their toll on sentiment towards UK equities and contributed to greater uncertainty surrounding the UK economy.
As such, some UK equity strategies have struggled to outperform, with 18 per cent of IA UK All Companies sector lagging the MSCI UK All Cap index over the three years in question.
The addition of LF Woodford Equity Income to the list in this edition reflects the FE Alpha Manager’s more bullish stance on the UK economy, reducing exposure to large-caps in favour of smaller, domestically focused business – a stance Bestinvest said has backfired.
Over three years to the end of 2018, the Woodford fund made a loss of 13.13 per cent, compared with a 19.54 per cent return for the FTSE All Share index – its actual benchmark – and a 12.2 per cent gain for its average IA UK All Companies peer.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Underperformance was an even greater issue in the IA UK Equity Income space as 35 per cent of the sector’s funds were featured in the ‘dog list’. The worst performer is the SJP UK High Income, which is also managed by Woodford.
“Sectors like financial services and the tobacco industry have often been popular with income managers, but both have lagged the wider market in recent years,” Bestinvest noted. “This may have contributed to the inflated number of equity income dogs.”
Funds lower down the market cap scale have fared better, with just two – Majedie UK Smaller Companies and Janus Henderson UK & Irish Smaller Companies – making the list.
As well as the UK there was a significant rise in the number of underperforming European funds, after the region’s worst calendar year since 2011, according to Bestinvest.
The region has been witnessed an unsteady political environment with budget battles between the EU and Italy, widespread protests in France and a slowing German economy.
The latest edition put 21 per cent of European equity strategies – or 18 funds – representing £6bn in assets on its list.
In the US, some £1bn in AUM – or 4 per cent of the IA North America sector – is currently being run by underperforming funds. In the previous research, this stood at £4bn, or 16 per cent.
“The US stock market has long had a reputation for being notoriously difficult for active managers to beat, which is why many investors have simply given up and chosen low-cost US tracker funds instead,” the firm noted. “However, there are signs that the tide may be turning, with more managers now outperforming and a sharp decline in the number of dog funds.”
The global equities sector remains a poorly performing hunting ground for investors with 14 per cent of strategies underperforming the MSCI World index. In total there were 20 dog funds with assets of £9.6bn – including a number of income-focused strategies – on the latest list.
“These funds are typically underweight the US market, where dividends are low, and tend to avoid big technology and new media companies as most of them do not pay dividends,” said the firm.
“However, massive increases in the share prices of these companies have boosted global stock market returns in recent years, leaving many income funds underperforming in relative terms.”
One notable inclusion, according to Bestinvest, is Jacob de Tusch-Lec’s Artemis Global Income fund, which at £3.9bn is the largest strategy among the underperforming global names.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Over three years to end-2018, the fund has made a 32.86 per cent total return, while the MSCI AC World index – its benchmark – is up by 40.18 per cent.
"As a value investor the fund manager has missed out on the great performance of growth stocks recently," the firm noted.
"He also searches less well-trodden areas of the market and has a bias towards small- and medium-sized companies, which means the fund will sometimes be out of step with the wider market – as was the case in 2018."
Japanese funds disappeared from this edition of the Spot the Dog list, although the addition five new global emerging market funds meant the sector has now reappeared.
“Assessing how your funds are faring has not been as easy as it may sound in recent years. This is because – up until 2018 – investors have enjoyed several years of rising stock markets,” added Hollands. “In this environment, even those funds that have done a relatively poor job and not kept pace with general rises in markets have mostly still delivered positive returns.
“However, things have changed recently, with 2018 seeing losses posted across global stock markets.
“Many investors will now discover that they’ve endured even worse absolute losses delivered by funds they have loyally held, where these have not managed to keep up with, or beat, the markets. “
The full Spot the Dog report can be downloaded for free at https://www.bestinvest.co.uk/research/spot-the-dog.