The number of underperforming funds in Bestinvest’s bi-annual ‘Spot the Dog’ report has fallen from the record high seen six months ago, although they still run close to £50bn of investor cash.
The latest edition of the report identified 119 so-called ‘dog funds’ that have underperformed in each of the past three years, with £49.6bn worth of assets currently invested in these underperforming portfolios.
“These include funds managed by some of the City’s most prestigious names who will no doubt soon be howling out their excuses as usual,” Bestinvest said.
This was a decrease from the record 150 funds in the previous report. This decrease was mainly down to UK funds recuperating in the second half of 2020 following the positive vaccine news, according to Bestinvest. 
But this is still a 33 per cent overall increase compared to this time in 2020.
The ‘Spot the Dog’ report looks for open-ended funds that have underperformed a representative benchmark for three consecutive 12-months periods across various sectors through statistical analysis. It applies a second filter to identify funds which have underperformed the benchmark by 5 per cent over the past three years.
Jason Hollands, managing director at Bestinvest, said: “If your savings are tied-up in an investment fund that is repeatedly delivering worse returns than the market it invests in then, then you really owe it to yourself to take a closer look and think about whether you might be better off moving it elsewhere.
“The differences between the best and worst performing funds are enormous and so it is essential to choose funds very carefully and then keep a beady eye on them or opt for low-cost trackers instead. The latter won’t beat the returns of market but will closely mimic them.”
Hollands added that it’s not so straight forward for investors to realise that their money is invested in a ‘dog fund’, because not all of them lose money. For example, while 32 of the funds in the report did lose clients’ money, most of them didn’t.
“That’s because stock markets in general have delivered very strong returns over the last decade and so nearly all ships have been lifted by the rising tide, even those with leaks in their hulls,” Hollands (pictured) said.
“If the value of your investments has gone up over the years, it is easy to assume that the fund manager has done an OK job. In reality, their decisions may not be adding any value whatsoever, though you’ll be paying them fees nevertheless.”
One key finding was that very few smaller companies’ funds appeared on the list, despite them being riskier strategies.
“We couldn’t find any smaller companies dog funds in the UK, North America, European or Japanese markets,” Bestinvest said. “Dog funds that invest specifically in smaller companies appear to be an extinct breed.”
In comparison there were 15 funds over £1bn on the list, so called ‘Great Danes’.
“These include funds that are widely held by private investors and managed by groups such as Invesco, St. James’s Place, Schroders and Hargreaves Landsown,” the report said.
Source: Bestinvest
Invesco took the title of ‘top dog’ for the sixth consecutive report, with 11 funds running a total of £9.2bn in the doghouse. This was a decrease in both the number of funds and assets versus the previous report.
Schroders also had 11 dog funds, but a lower value of assets (£4bn).
Source: Bestinvest
As mentioned above the biggest contributor to the drop in total dog funds came from the UK sectors, “as positive news about coronavirus vaccines fuelled a sharp recovery in some of the hardest hit parts of the market”.
There were just 14 UK equity funds on the list this time, down from 51 in the previous report, with seven dogs apiece in the IA UK All Companies sector and IA UK Equity Income sectors.
Five of the IA UK All Companies funds were repeat offenders from last time: Invesco Income, Invesco UK Equity High Income, Jupiter UK Growth, Jupiter Growth & Income and Legal & General UK Special Situations.
On the income side the worst performer was LF ASI Income Plus, which was previously managed by Neil Woodford.
Bestinvest added that “Woodford also casts a continued shadow over the HL Multi-Manager Income & Growth trust, by far the biggest UK equity income dog at £2.1bn,” as it had backed his flagship fund – LF Woodford Equity Income - before it was wound down.
The report noted that 2020 had been “especially challenging for UK equity income funds” as UK dividends were savagely cut to help businesses cope with the effects of Covid-19.
“[But] it looks like the worst is now over,” the firm said, with banks and some other companies resuming payouts.
“But it will likely take a few years before dividends return to the levels seen before the crisis as profits need to be rebuilt,” it added.
Source: Bestinvest
*Three-year underperformance is the extent to which a fund lagged the market it invests in, not the absolute return delivered by the fund. All data is total return (including dividends reinvested) for periods to 31 December 2020.
IA North America had more dog funds than the UK, with 21 in total. This is because the US market is notoriously difficult to outperform, hence why tracker funds have become so popular in the sector, Bestinvest said.
“This has especially been the case in an environment where a relatively narrow group of companies has driven much of the US market’s recent returns,” they said.
The funds that did underperform were those invested outside of the dominant growth stocks the market is currently favouring, investing in dividend-generating companies or targeted undervalued shares instead. This includes funds such as M&G North American Value, GAM North American Growth, Jupiter North American Income, Liontrust US Income and Merian North American Equity.
As usual the IA Global sector had the highest number of dog funds, totalling 28.
Bestinvest explained that with the US making up a large proportion of the MSCI World index, any funds taking a diversified approach are more likely to perform benchmark, leaving more room for underperformance.
“This makes the global funds sector a regularly packed haunt for investment canines,” it said.
This is where many of the ‘Great Dane’ funds were found, such as Schroders Personal Wealth MM International Equity, M&G Global Dividend, St James’s Place Global Equity, St James’s Place Global and Invesco Global Equity (UK).