McDermott’s comments come in light of the publication of Chelsea’s ‘Redzone’ and ‘DropZone’, which suggest funds that investors should consider removing from their portfolio. These studies highlight funds that have underperformed their sector over the last three discrete years to 1 August 2012, and then flag up the 10 portfolios that have underperformed by the greatest margin over the cumulative three-year period.
The list includes funds belonging to a number of the largest fund houses, such as Scottish Widows, JP Morgan and Standard Life investments. McDermott believes these groups need to re-evaluate their strategy and even consider closing these funds.
Funds with the greatest underperformance over 3-yrs
| Position | Fund | % underperformance from sector average |
| 1 | Manek Growth | 68.11 |
| 2 | UBS UK Smaller Companies | 49.81 |
| 3 | Allianz Global Eco Trends | 41.35 |
| 4 | Barmac The Castleton Growth | 39.75 |
| 5 | Neptune Japan Opportunities | 37.05 |
| 6 | Standard Life Investments UK Opportunities | 31.31 |
| 7 | SVM Global Opportunities | 30.1 |
| 8 | JPM Cautious Total Return | 25.07 |
| 9 | Templeton Global Emerging Markets | 24.57 |
| 10 | Fulcrum Global Diversified | 23.32 |
Source: FE Analytics
He said: "Now it’s only fair to acknowledge that these companies run a large number of funds so you would possibly expect them to have a few more underperforming funds lurking around."
"It doesn't mean this performance shouldn't be addressed though, and perhaps begs the question whether these companies should concentrate on areas where they excel, rather than trying to be all things to all men."
"The question is: where a group suffers in an asset class, how long can they afford to keep a fund running in that sector?"
McDermott highlights Scottish Widows as a particularly poor performer.
"Scottish Widows-managed funds actually dominate the RedZone this time around, both in terms of numbers and total assets. They represent the highest number of shoddily performing funds on our list, both in terms of overall numbers and total assets," he said.
Although McDermott feels the asset management group has attempted to iron out the issues in a number of its underperforming funds, he adds that more action must be taken in order to maintain investors' interest.
He commented: "I feel it's also only fair to acknowledge that Scottish Widows has started to address some of its problems, by starting to transition a number of its funds to an enhanced index strategy."
"Hopefully this will pay off, but the funds on our list are so far not included in these plans."
"£10bn represents a huge number of investors who should expect a lot better from those to whom they entrust their savings."
He also highlighted Scottish Widows Investment Partnership (SWIP) as a group that has let down a lot of its investors.
"SWIP has been a perennial struggler in our Redzone," he continued. "A lot of its funds are run by banks so the inflows are there, but performance has been consistently poor and we want investors to see this."
Hargreaves Lansdown’s Rob Morgan (pictured) also feels that large fund houses should look to concentrate on areas where they succeed, to protect the interests of their clients.
"Our view is that there are too many funds out there and investors do not need the amount of funds that are available," he said. "We welcome consolidation and are very wary of fund houses that launch new funds when a number of their existing funds are underperforming."
Overall, Chelsea flagged up 130 funds that have underperformed in each of the last three discrete years – a marked increase from the last time the study was conducted in March this year.
"Not only has the number of dud funds in our wider RedZone almost doubled to 130, but the amount of underperforming assets has more than doubled too," McDermott continued.
"An eye-watering £32.86bn of investors’ money has been consistently languishing in the third and fourth quartiles for the last three years."
"Our analysis makes for pretty depressing reading and I can only urge anyone invested in these funds to consider whether they want to remain invested or switch as quickly as possible to a better fund."
Morgan believes that certain funds in the DropZone are still worth holding, however.
He commented: "You have to look under the bonnet of these funds; take Neptune Japan Opportunities for example. It has a long-standing short currency position in the yen and this is the reason the fund has struggled."
"It is clear that all funds that are hedged in this sector have struggled so it is not down to the manager’s skill, and if you subscribe to this view then you shouldn’t worry."
Similarly, McDermott shows support for Sanjeev Shah’s Fidelity Special Situations fund, which was again in the Redzone.
"I've been a long-term fan of this fund and am sad to see it in the RedZone, but I'm pleased to see that shorter-term performance year-to-date has been good and hopefully signals the beginning of a turnaround," he finished.