A handful of perennially underperforming funds have been named and shamed in Bestinvest’s latest Spot the Dog report.
In this edition of the twice-yearly lists, 31 funds have been identified that meet the criteria to be labelled as dogs. This is less than half of the 86 funds revealed in the last report, and the amount of assets held in these mutts has dropped even more substantially from £45.4bn to £10.7bn.
The dog fund earn their masters almost £115m in annual fees, based on their current size and annual ongoing costs.
There are the three funds in the list that have more than £1bn under management: Halifax UK Growth, Halifax UK Equity Income and Scottish Widows UK Growth.
These 'Great Danes' manage a grand total of £6.7bn on behalf of investors and have been on the dog list for so long that underperformance seems entrenched.
The relatively small number of dogs this time round reflects two aspects of the selection process. One is that performance is measured relative to a benchmark index – so the fund must have underperformed compared to the market it invests in by 5% or more over a three-year period.
A second filter is that the fund must also have underperformed in three successive 12-month periods on the trot.
While there are unfortunately plenty of funds that have undershot the markets they invest in over the last three years, a change in fortune for funds investing in undervalued companies and dividend paying shares, means many of the funds that dominated the list in recent editions have escaped this time due to a much stronger relative performance in the last several months.
With inflation surging, borrowing costs rising and the war in Ukraine, sectors like energy, commodities, consumer staples and healthcare have had a much better run of performance compared to ‘growth’ sectors like technology, communications services and consumer discretionary companies that previously delivered stellar returns.
Many of the growth-orientated funds that have suffered in this most recent year are kept out of the list by their strong performance in the previous two years.
The 10 biggest beasts by size:
HBOS and Scottish Widows are both parts of the Lloyds Banking Group and the three funds are advised by investment giant Schroders.
The Scottish Widows and Halifax UK Equity Growth Funds are run to identical strategies; as are the Scottish Widows and Halifax UK Equity Income funds.
They are designed to favour companies with defined characteristics, including those that are often described as 'value', as opposed to 'growth'. These companies have tended to underperform over the period, so funds with similar characteristics have tended to underperform accordingly.
A Lloyds Banking Group spokesperson responded: “We continue to take a long-term view approach to investment management, and we work continuously to improve performance across our entire fund range.”
The 10 worst-performing beasts overall:
The worst performers appeared in the global sector where there tend to be the fewest constraints on both style and geography, leading to some niche approaches – which don’t always work out.
The FTF Martin Currie Global Unconstrained fund has the unfortunate accolade of being the worst relative performer, with the fund lagging its index by -34% over the three-year period, turning £100 into £94 over the three years.
When it comes to absolute losses, two funds in the list vied for the trophy. The Schroder European Sustainable Equity fund left investors with £82 for every £100 invested over the three years, undershooting the index by -27%, narrowly edging the Jupiter UK Growth fund, which reduced £100 to £83 over the same period.
UK-focused funds are responsible for a big slice of doggy assets this time, with funds in the UK All Companies and UK Equity Income sectors contributing fully £7.6bn, or more than 70%, to the £10.8bn total of assets under canine management.
The number of global equity income funds appearing on the list has dropped from 14 last time around to zero. Their income-earning mandates dictate low weightings towards growth stocks - which typically don’t pay a dividend - and the US market more widely.
That had been a handicap until recently, but has now dragged them out of the doghouse thanks to better performance among value and dividend-paying equities in the last several months.
While the global and global equity income funds on the list amount to less than £1bn in assets, down from £18.5bn in February’s edition, the global sector still contributed 10 of the 31 dogs.
Schroders’ own-brand funds are largely absent from the list this time, but the FTSE 100-listed asset manager is the investment adviser on this edition’s biggest hounds from HBOS and Scottish Widows: the Halifax UK Growth, Halifax UK Equity Income and Scottish Widows UK Growth funds already highlighted.
It is more than two years since Schroders completed the transfer of the funds from Scottish Widows and even longer for the HBOS funds.
The HBOS funds in particular remain some of Spot the Dog’s most persistent offenders and their poor performance has continued through a range of market conditions.
Jason Hollands, managing director at Bestinvest, commented: “While short-term periods of weakness can be forgiven, as a manager may have a run of bad luck or their style may be temporarily out of fashion, there can be more concerning factors at work: important changes in the management team; a fund becoming too big, which might constrain its flexibility or a manager straying from a previously successful approach.
“The exceptional 12-year period of strong equity market performance that came to something of a halt at the end of last year meant that until very recently most funds investing in equities generated gains irrespective of the skill of their managers – and this has helped to disguise poor relative performance and bad value for money.
“In a bull market when most funds rise in value with the upward tide, investing can seem all too easy but tougher times are a period to reflect on your approach.“
Bestinvest only looks at the fund universe of open-ended funds - unit trusts or OEICs - and only those available to UK retail investors.
To make the list, a fund must first have failed to beat its benchmark over three consecutive 12-month periods, to highlight consistent underperformance. Second, the fund must have underperformed the benchmark by 5% or more over the entire three-year period of analysis – which in this case ends on 30 June.
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