Today Chelsea released its biannual RedZone, which lists all the funds that have been either third- or fourth-quartile performers over each of the last three calendar years.
Its DropZone highlights the 10 funds that have underperformed their sector average by the largest amount over the cumulative three-year period.
Manek UK Growth, UBS UK Smaller Companies and Mobius’s Templeton Global Emerging Markets are repeat offenders, having made the list the last time it was updated back in September last year.
The Chelsea DropZone
| Fund | % underperformance from sector average |
|---|---|
| Manek Growth | 52.98 |
| UBS UK Smaller Companies | 37.97 |
| IM HEXAM Global Emerging Markets | 35.67 |
| Aviva Inv Property Investment | 30.87 |
| Templeton Global Emerging Markets | 28.05 |
| F&C High Income | 27.79 |
| Legal & General Growth | 26.67 |
| JP Morgan European Smaller Companies | 23.67 |
| Marlborough UK Income & Growth | 23.33 |
| City Financial Strategic Gilt | 21.96 |
Source: Chelsea Financial Services
Once again, Manek Growth tops the list overall. The fund’s medium-term performance does not make good reading, but its long-term numbers are even worse: according to FE data, it is the worst-performing portfolio in the IMA UK All Companies sector over 10 years, with losses of 2.49 per cent over.
This compares with a positive return of 121.37 per cent from the sector average.
Performance of fund vs sector over 10yrs
Source: FE Analytics
The £21m fund is managed by Jayesh Manek, who is renowned for winning the Sunday Times’ Fantasy Fund Manager competition in 1994 and 1995.
While Manek Growth’s difficulties are well documented, Chelsea’s DropZone underlines the point that even the most experienced managers can witness extended periods of poor performance.
The £15.2m Templeton Global Emerging Markets fund – which is headed up by the highly experienced Mobius – has been a bottom-quartile performer in the IMA Global Emerging Markets sector over one, three and five years, having lost money over each of those time frames.
This has meant that since its launch in March 2004, the fund has returned 91.76 per cent, while the MSCI Emerging Markets index and the IMA Global Emerging Markets sector have returned 183.64 per cent and 174.27 per cent, respectively.
Performance of fund vs sector and index since March 2004
Source: FE Analytics
FE Alpha Manager Geoff Hitchin also has a huge amount of experience, successfully running bond funds in the IMA universe since August 1987. However, his latest venture into the IMA UK Equity Income sector has not been as fruitful.
The £24.2m Marlborough UK Income & Growth fund has returned 20.65 per cent since Hitchin joined Nicholas Cooling as co-manager in December 2011, while the average fund in the sector has returned 34.93 per cent.
The fund has a headline yield of 3 per cent; however, our data shows the portfolio’s net distribution has dropped over recent years.
Darius McDermott (pictured), managing director of Chelsea, says investors should not automatically dismiss a fund for being in the RedZone or DropZone, but says consistent underperformance needs to be taken very seriously. "[This study] is designed to bring to investors' attention those funds which are consistently underperforming and therefore warrant at least a review if held in their portfolio. At times though, we think it necessary to highlight areas where we believe there to be extenuating circumstances," he explained.
McDermott says there are a number of funds that have been heavily impacted by external factors which have had an adverse effect on the managers' long-term goals.
"This time round, we think a couple of multi-asset fund ranges which find themselves in the list are worthy of mention," he said. "The first are three funds from Fidelity, managed by the very experienced Trevor Greetham: Multi Asset Defensive, Growth and Strategic."
"The issues with performance have been caused by the markets moving very quickly and as a result of political and central bank intervention, rather than market fundamentals."
"As markets have started to behave in a more conventional way in 2013, the performance of these funds has started to improve," he added.
McDermott says that the L&G Multi Manager range – which features prominently in the RedZone – has suffered as a result of the management team’s high exposure to gold and gold mining stocks.
He also defended the City Financial Strategic Gilt fund, which sits in the DropZone.
"The fund’s underperformance is due to the manager believing that the whole asset class is grossly overvalued," McDermott said.
"With gilt yields close to 300-year lows, he thinks prices will fall quite dramatically when yields normalise, leading to inevitable capital losses. As such, the fund is positioned to avoid heavy losses when this situation unfolds."
"We actually agree that gilts look overvalued and the risk to capital, once interest rates start to revert to normal, could be significant. This has been a bold position and has hurt performance, but may serve investors well as QE is unwound in the US," he added.
The £20m City Financial Strategic Gilt fund has been managed by Ian Williams since its launch in December 2006. Over that time the fund has returned 22.84 per cent, while the IMA Gilt sector has returned 36.75 per cent.
Performance of fund vs sector since Oct 2006
Source: FE Analytics
Although the fund has been a bottom-quartile performer over three and five years, Williams’ strategy has meant the portfolio has topped the sector over 12, six and three months.
City Financial Strategic Gilt requires a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.42 per cent.
Among the highest profile funds in the Chelsea RedZone are Threadneedle Asia, Jupiter Ecology, Fidelity Japan, Neptune US Opportunities and BlackRock UK Income.