Number of underperforming UK funds jumps by 'staggering' 65%

Anna Fedorova
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Number of underperforming UK funds jumps by 'staggering' 65%

A record-breaking 150 so-called ‘dog' funds have been identified in the latest bi-annual Bestinvest Spot the Dog report, with total assets of £54.4bn sitting in these vehicles.

The latest "staggering" figures represent a 65% increase in the number of funds that have consistently underperformed their benchmarks over the past three years and the highest number Bestinvest has on record.

Jason Hollands, managing director at Bestinvest, said: "Markets have given investors a rollercoaster ride this year. The covid-19 crash between late February and the end of March was very rapid but the rebound in stockmarkets since then has been impressive.

"However, look beneath the bonnet and there have been big disparities in performance across industry sectors."

Big names on the list are St. James's Place, with eight funds worth £6.9bn; M&G with seven funds worth a total of £2.4bn; Fidelity, with £3.9bn in four 'dog' funds; and Schroders, with a total of 10 funds on the list with total assets of £2.7bn."

Invesco retains the Top Dog spot for the fifth time in a row, with 13 funds worth a total of £11.4bn making it onto the list this time.

Prominent among those are funds previously managed by Mark Barnett. Invesco's £3.3bn High Income fund tops the list, while its £1.6bn Asian fund and £1.5bn Income fund also made it into the top ten 'dog' funds by size.

However, since Barnett has recently been replaced as manager, Bestinvest notes a turnaround of performance could be on the cards.

Other big names on the list are St. James's Place, with eight funds worth £6.9bn; M&G with seven funds worth a total of £2.4bn; Fidelity, with £3.9bn in four 'dog' funds; and Schroders, with a total of 10 funds on the list with total assets of £2.7bn.

Overall, 18 funds in the latest list hold over £1bn of investors' money each and are managed by prominent fund groups, though the majority of funds are smaller, with the median fund holding just £133m in assets.

On the other hand, a number of large investment houses have managed to avoid the list altogether. These include Aviva Investors, Baillie Gifford, BlackRock, Evenlode, Fundsmith, JO Hambro Capital Management, Lindsell Train and Stewart Investors.

Growth vs value
The sectors with the highest proportion of 'dog' funds are UK Equity Income and Global Equity Income, with 26% and 25% of funds in the dog house, respectively.

Bestinvest notes that this, in part, reflects the slew of dividend cuts during the Covid-19 pandemic and the strong outperformance of growth stocks over the years.

Hollands said: "The underperformance of value-focused funds compared to those targeting growth and quality stocks is a trend that has been playing out for some time now, but during 2020 the gap in fortunes between such funds has become quite extreme.

"[However], no investment trend lasts forever and it just might be the case that as the post-lockdown economic recovery phase gathers pace, we will start to see a turn in fortunes for those parts of the market that have been out of favour and the managers who in turn back unloved companies.

"If and when this happens, we can expect that a number of the funds that have currently found themselves in Spot the Dog might make a swift bolt for the exit."

Conversely, the lowest proportion of dog funds were found in the UK All Companies and Global Emerging Markets sectors, with just under 11% of each sector classified as 'dog' funds. Smaller companies funds also did much better than large-cap counterparts, with just four such funds making it onto the list across the globe.

Hollands added that while investors should take a close look at any 'dog' funds they might hold in their portfolios, they should not automatically hit the sell button after a period of underperformance without exploring the reasons for it.

"In some cases, repeatedly poor decision-making or unjustifiably high fees may be to blame. There are a lot of pedestrian funds out there," he said.

"In others this can be down to a particular approach that has worked well in the past being out of favour with current market trends.

"In some cases, it may make sense to persevere and stay put, if you believe that the factors that have driven the period of underperformance are temporary and will soon lift. However, where there is no turnaround in sight it might be better to move elsewhere."

Methodology
The report, which has been published regularly since the mid-90s, names and shames the "worst-of-the-worst" retail stockmarket investment funds that have consistently delivered poor returns in the markets they invest in.

It covers unit trusts and open-ended investment companies that are widely held in private investors' Individual Savings Accounts and pensions.

Bestinvest rounds up the funds that invest in a wide range of markets, including the UK, the US, Europe, Japan, the Asia Pacific region and emerging markets, as well as funds with a global remit.

To be included in the Spot the Dog report, a fund must have delivered worse returns than the market it invests in for three consecutive 12-month periods in succession and by more than 5% over the entire three-year period assessed.

These twin filters identify consistent poor performers rather than funds that may have experienced a short-term upset.

This article was first published by our sister title Investment Week