Aberdeen Standard Investments, Fidelity and UBS were among the worst offenders in the latest Bestinvest ‘Spot the Dog’ report, although the amount held in consistently poor performers fell to £6.4bn.
The number of ‘dog’ funds has dropped from 34 – representing assets of £7.6bn – in the firm’s last report six months ago to 26 in the latest edition of the semi-annual report, according to Bestinvest.
Each fund included in the ‘Spot the Dog’ list has underperformed the market it invests in for the past three consecutive calendar years and by more than 5 per cent over a three-year period.
The main reason for the sharp reduction in assets held over the past six months was down to SJP Equity Income escaping inclusion in the latest edition.
Global equities remained the poorest-performing asset class with six funds spread across the IA Global and IA Global Equities sectors, although this has fallen since the last edition when 17 funds were included. The second worst sector is US with five funds, down from six.
At a group level Aberdeen Standard Investments had the most assets held in dog funds, amounting to £1.7bn, although the number of its funds listed has fallen from 11 to four over two years. In second place, Fidelity had £955m in dog funds while UBS had £882m.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Aberdeen Standard Investments inclusion is largely down to the Aberdeen Asia Pacific Equity fund, representing £1.3bn of its £1.8bn total.
The fund has generated a total return of 34.84 per cent over three years, compared with a 46.1 per cent gain for the MSCI AC Asia Pacific ex Japan index benchmark and a 45.61 per cent return for the average IA Asia Pacific Excluding Japan fund, as the above chart shows.
Indeed, it is one of just three funds from the Asia Pacific equity sector, including worst performer SJP Asia Pacific – previously managed by Aberdeen until mid-2016 when it lost the mandate to First State Investments – and Allianz Total Return Asia.
Meanwhile, the bulk of Fidelity’s dog assets are tied up in the one FE Crown-rated £906m Fidelity American fund, overseen by Sujay Kodikeri since June last year.
While the North American market can be a difficult one for active managers to outperform, the latest edition of the dog list represents the lowest number of outperformers in recent times.
According to Bestinvest, the Fidelity fund “has periodically exhibited bad behaviour and has seen a number of manager changes over the years”.
Over three years, the fund has delivered a total return of just 39.12 per cent compared with a gain of 55.97 per cent for the S&P 500 index and a return of 48.23 per cent for the average IA North America fund, as the below chart shows.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
The worst North American fund on the list is the Janus Henderson US Growth, which has delivered a 17 per cent loss relative to the S&P 500.
Like Fidelity, UBS owes its position in the top three asset managers by dog fund assets because of one fund: the UBS Global Enhanced Equity Income fund.
The £882.4m one crown-rated fund has been managed by Patrick Zimmerman since 2014 and has a historic yield of 6.9 per cent.
The fund has delivered a total return of just 22.65 per cent compared with a 47.71 per cent gain for the MSCI AC World benchmark and a 32.98 per cent gain for its average IA Global Equity Income sector peer.
While the global equities sector has seen a dramatic reduction in the number of funds it remains the most heavily populated.
Bestinvest attributed the upturn in performance thanks to a particularly strong run in emerging markets, Asia and Europe compared with the US, helping to lift a number of funds with lower North America exposure out of the list.
Closer to home in the UK market there were just two dog funds, both overseen by Aberdeen, from the IA UK All Companies and IA UK Equity Income sectors.
The Aberdeen UK Equity Income and Aberdeen UK Equity funds made the list returning 14.48 per cent and 19.45 per cent respectively against a gain of 26.75 per cent for the FTSE All Share benchmark, as the below chart shows.
In the UK smaller companies space there were also just two funds – Elite Webb Capital Smaller Companies Growth and Baillie Gifford British Smaller Companies – after an absence of the sector from recent editions of the list.
Performance of funds vs benchmark over 3yrs
Source: FE Analytics
Highlighting the drop in the number of dog funds in the first edition of 2018, Bestinvest managing director Jason Hollands (pictured) said: “In the last five years the number of dog funds has been as high as 60 and only two years ago there was as much as £18bn tied up in such investments.
“The drop in the number of both dog funds and the amount of investor money in these is very welcome.
“Only time will tell whether this is a temporary blip or a sign that the investment industry has got its house in order by replacing underachieving managers or merging away seriously failing funds.”
However, Hollands said the task of spotting serial underperformers had become more difficult in recent years given the ongoing equity bull run.
He added: “Rising markets are likely to convince many investors that the fund managers their money is with are doing a rather good job when in fact they have detracted from the potential returns that could have made elsewhere.
“However, the long bull run investors have enjoyed will not last forever. When markets enter a more challenging period, as they will do at some point, being invested in laggard funds that charge fees but add no value could mean staring at actual losses.”