There has been a significant increase in underperforming funds since the start of 2019, according to the latest edition of Chelsea Financial Services’ RedZone study, with 230 funds – representing almost £98.7bn – judged to have underperformed over the past three years.
The RedZone – which aims to ‘name and shame’ the worst performers of the past three discrete calendar years – recorded a 49 per cent increase in underperforming assets from last year’s £66.3bn. 
Chelsea Financial Services’ managing director Darius McDermott (pictured) said the pick-up in underperforming funds is largely down to global equity strategies.
The IA Global sector has 48 funds in the RedZone – up from 22 in 2019 – while the amount held in underperforming strategies soared from £4.6bn last year to £17.6bn this time around.
“A number of managers are likely to have been underweight the US, as valuations and a prolonged bull market have made them wary,” he explained.
The second worst-performing sector, said McDermott, is IA North America, “as funds struggled to keep up with a rapidly rising stock market”.
The IA North America sector has 26 funds in the RedZone, with around £11.7bn in assets. In third is IA UK All Companies, which has 20 underperforming funds with £15.7bn in assets, although this is eight fewer than 2019.
In terms of fund groups, Aberdeen Standard is the worst offender with 15 funds – and £7.6bn in assets – in the RedZone, although this represents a 25 and 30 per cent year-on-year decline, respectively.
“Aberdeen Standard Investments’ turnaround has been slow but is still improving,” said McDermott. “The second worst company is Invesco – also second last year – with 14 funds and £11.4bn, while Schroders is in third place with eight funds and £4.5bn.”
In addition, there were a number of funds that significantly underperformed their peer group over the cumulative three-year period, putting them in the DropZone.
Source: Chelsea Financial Services
This year’s DropZone of 10 funds includes eight new names and is dominated by global energy strategies, said McDermott.
“This reflects the fact that the global oil & gas sector [FTSE World Oil & Gas] has significantly underperformed over three years, losing 3.32 per cent of its value compared with a 32.31 per cent gain for the wider global stock market [FTSE World],” he explained.
At the top of the list is the $279m Schroder ISF Global Energy fund, overseen by Mark Lacey.
Over the three years to 31 December 2019, the fund underperformed the IA Global peer group average by 66 percentage points, according to the study.
During that period, it made a loss of 34.74 per cent compared with a fall of 8.16 per cent from its MSCI World/Energy benchmark and a 31.07 per cent gain for the average IA Global fund.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Schroder ISF Global Energy made losses in each of the three calendar years, although after double-digit falls in 2017 and 2018, these were pared back to a 4.68 per cent loss last year as most asset classes rose.
Other energy strategies in the DropZone are Guinness Global Energy (underperforming its peer group by 49.62 percentage points) and MFS Meridian Global Energy, which also appeared in last year’s DropZone and underperformed the peer group by 48.25 percentage points.
With these three funds, the IA Global sector was the most represented in the Dropzone, with seven sectors accounting for the other seven funds.
The RedZone also contains a significant number of large funds that McDermott said investors should keep an eye on.
“Given the large increase in investor assets this year, we also thought it pertinent to highlight the largest funds in the RedZone as presumably they will also have the largest number of disappointed investors,” said McDermott.
Source: Chelsea Financial Services
The largest underperforming fund in the RedZone is Invesco High Income (UK) managed by co-head of UK equities Mark Barnett, whose Invesco Income (UK) fund also featured among the top-10 largest underperformers.
Over the three years to year-end 2019, Invesco High Income made a loss of 0.52 per cent – the worst performer on the list – while Invesco Income was up by 0.52 per cent, compared with a 23.75 per cent gain for the average IA UK All Companies peer.
While featuring in the list of largest underperformers, it is worth noting that the £2.5bn Pictet Digital fund – overseen by Sylvie Sejournet, Stanislas Effront, and Oliver Djopwouo – made a return of 52.24 per cent over the past three years. This was significantly higher than many other peer groups’ average return but 14 percentage points lower than that of the 16-strong IA Technology & Telecommunications sector.
More information about the Redzone can be found here.