The amount held in underperforming ‘dog funds’ soared over the past six months despite 2019 being a “fantastic year for stock markets”, according to the latest edition of Bestinvest’s Spot the Dog report. 
In the six months since the last Spot the Dog report, the number of dog funds has risen to 91 – up from 59 at the end of June – with the level of assets also rising significantly from £32.6bn to £43.9bn.
According to Bestinvest, this means that £410m is currently being paid in ongoing charges by investors in “serial underachievers” based on current fund values.
The biannual study aims to find out which funds have underperformed a representative benchmark for three consecutive 12-month periods. A second filter identifies funds that have underperformed the benchmark by 5 per cent over a three-year period.
With over 97.4 per cent of open-ended funds making a positive total return in 2019, it would be easy to imagine fund managers are doing a great job, said Bestinvest managing director Jason Hollands (pictured).
“However, in many cases the returns enjoyed have had little do with the decisions taken by fund managers and they may be substantially lower than the gains delivered by overall markets,” he noted.
“In these circumstances, investors have basically paid fees for little or no added value.”
On an asset manager level, Invesco once again took the title of ‘top dog’ with 11 funds in the doghouse running around £13.1bn of assets – or around 29.8 per cent of dog fund assets. This is an increase of six ‘dog’ funds onto its total since last summer.
Invesco’s UK funds continue to underperform – including three run by Mark Barnett – although the list has broadened somewhat with the addition of several European funds, one US and a Japanese strategy.
Source: Bestinvest
JP Morgan Asset Management emerged as the second worst performing asset manager, having not featured in the top-10 last time around. Its presence was down to one fund – the £3.8bn JPM US Equity Income fund. It has been hampered by its income focus in a market where leadership has been concentrated in technology stocks that rarely pay dividends.
Link Funds emerges in third place, due to the inclusion of £3bn LF Equity Income fund – Neil Woodford’s former flagship LF Woodford Equity Income fund. However, it is time to say goodbye as “the most notorious fund to ever set its paws in the Bestinvest kennel” is now being wound down.
Another new entrant to the top-10 is Hargreaves Lansdown due to the inclusion of the £2.7bn HL Multi-Manager Income & Growth fund, which hasn’t been helped by the lacklustre run of LF Woodford Equity Income – a 10.9 per cent holding.
In terms of sectors, North America had the highest proportion of underperforming dog funds with 30 per cent underperforming the MSCI USA benchmark.
The market is widely recognised as one where it is difficult to outperform due to the fact that it is heavily researched and extremely efficient.
Nevertheless, there has been a significant uptick in the underperformance with the number of dog funds increasing from three in the last edition of the report to 18.
“Three of the new entrants target dividend-generating companies and have struggled in a market that has been dominated by ‘growth’ stocks,” the firm noted.
Performance of funds vs index over 3yrs
Source: FE Analytics
The firm also highlighted two repeat offenders in LF Canlife North America and VT De Lisle America, which have made returns of 22.58 per cent and 7.05 per cent respectively against the benchmark’s 40.48 per cent return.
Some way behind is the European sector with 19 per cent of funds in the doghouse. The number of dog funds climbed from 11 to 15 in the latest report, representing assets of £4.8bn.
Invesco is the main culprit with its £2.2bn Invesco European Equity fund representing almost half of all dog fund assets. Its contrarian approach to investing in undervalued companies has struggled at times.
Like the North America sector, regional equity income strategies have also struggled.
Closer to home, the combined UK fund sectors are home to 22 dog funds with assets of around £20.4bn, according to Bestinvest. Of this, 41 per cent sits in funds managed by Invesco co-head of UK equities Mark Barnett, including Invesco High Income, Invesco Income and Invesco UK Strategic Income
“Barnett’s funds have suffered in part due to a heavy exposure to unloved, domestically-focused UK companies, as well as some stock-specific disappointments.
“The funds have also had to deal with the challenge of significant outflows at a time when the manager has been reducing exposure to less liquid holdings.”
There were 16 dogs in the UK All Companies sector – 9 per cent of the total – running assets of £16.1bn. Bestinvest noted that the average return from the peer group beat that of the UK market (MSCI UK All Cap), “meaning many managers did a decent job”.
There were six UK equity income dog funds representing assets of £4.3bn, with the aforementioned HL Multi-Manager Income & Growth one of the biggest underperformers alongside repeat offender the £1bn SJP UK High Income fund, previously managed by Woodford Investment Management and is down by 7.54 per cent over three years.
Performance of fund vs index over 3yrs
Source: FE Analytics
However, the IA UK Smaller Companies sector was notably free of dogs, although the same couldn’t be said for European Smaller Companies, which having had no dogs last time around saw two new entrants: M&G Pan European Smaller Companies and Invesco European Select Smaller Companies.
Global equity funds have gained in popularity recently with strong performances to be had, but they weren’t immune from underperformance issues.
Nevertheless, there were 25 funds in the doghouse (or 16 per cent of the total 155, representing £9bn of the £105.4bn run in the sector), although 13 had income generation as part of their remit.
“This puts them at a disadvantage compared to the global indices they are typically compared against,” the firm said, noting that most benchmarks are heavily skewed to the low-yielding US market.
Elsewhere, there were just four Japanese dogs with assets of £2.4bn (around 16 per cent of total assets), including the £2bn Man GLG Japan CoreAlpha fund. Meanwhile, the representation of the Asia Pacific sector remained low with just three dogs running assets of £241m.
There were just two emerging market dog funds making the latest Spot the Dog report, with combined assets of £394m – 2 per cent of the sector’s £16.9bn total.
“The minnow-sized Janus Henderson Emerging Market Opportunities fund appears for a second time and is now joined by the SJP Global Emerging Markets fund,” noted Bestinvest.
“The latter is also managed by Janus Henderson, so this group really does appear to have marked its territory in this small corner of the doghouse.”
However, the firm noted that management of the SJP fund is to be taken over by Somerset Capital later this month.