As an ordinary punter, it can be tough to stay one step ahead and make prudent and profitable decisions about where to invest your hard-earned cash.
But twice a year a report surfaces that names and shames underperforming investment funds, and managers ‘live in fear of being included in the kennel of shame’, according to its authors.
The ‘Spot the Dog’ research by Bestinvest gives investors the chance to see which funds belong in the doghouse and which, for the time being, deserve to be on the main stage at Crufts.
It’s a dog eat dog world: The fund world is highly competitive but often fraught with pitfalls
The latest findings by Bestinvest show that the number of underachievers on the fund front has jumped.
This is partly due to the gulf between the performance of growth versus value and income funds, which has been exacerbated by the pandemic.
The difference in performance levels is striking. While the average fund in the IA Global sector posted a 32.4 per cent return, the best performer managed to make a 162.6 per cent return, and the poorest ended up down 9.6 per cent.
‘This highlights the need to be super selective when choosing a fund manager to look after your cash and, once invested, how important it is to continue to regularly monitor your investments and check whether they are delivering value for money’, Bestinvest said.
Which big fund firms belong in the dog house?
All in all, 119 investment funds have consistently underperformed the sectors they invest in, according to Bestinvest, which is part of the Tilney group. A copy of its full 32-page report is available for free here.
The amount of money represented by the severe underperformers is a whopping £49.6billion. The list of ‘mutts’ meanwhile has increased by 33 per cent in a year, and it features some of the City’s most prestigious names – Invesco, Jupiter and Schroders included.
Invesco has retained its place as ‘Top Dog’ for the sixth time in a row. Eleven Invesco funds feature in the doghouse listings, with a total value of £9.2billion.
It’s enough to make you yelp: The 10 worst performing fund management groups in Bestinvest’s latest findings
How does a fund get labelled a ‘dog’?
A fund must have failed to beat its benchmark for three 12-month periods running and underperformed by five per cent or more over the entire three years.
The report is not a ‘sell list’, but is based on an analysis of past performance which is not necessarily a guide to how a fund will perform in the future. In many cases it is likely that the cyclical and financial environment of recent years have simply not suited the fund’s raison d’etre.
There may be good reasons to believe that, in some cases, future prospects are brighter.
So, which funds have done particularly badly?
Here are two lists of the top 20 underforming dog funds, first by size, and second by the extent to which they have lagged their sector.
Some of the Invesco funds, including the former flagship Invesco Income and Invesco UK Equity High Income funds, have now been handed over to new managers who have been tasked with turning their fortunes around.
Pretty ruff: The biggest beasts in Spot the Dog by fund size, according to Bestinvest
Pawful: The most significant underperformers in the latest Spot the Dog report by Bestinvest
The Invesco UK Equity High Income Fund has underperformed the market it invests in to the tune of minus 21 per cent, while the Invesco European Equity Fund is lagging by 17 per cent over the three-year period, according to Bestinvest.
‘Invesco’s investment centre in Henley has been going through a shake-up over the last year under a new chief investment officer. This is clearly a work in progress,’ Bestinvest said.
Jupiter has also fared poorly in Bestinvest’s latest rankings.
It leapt from ninth to second place, having become a rescue home for Merian Global Investors, which it snapped up last year.
UK wealth manager St James’s Place came in third place in the worst-of-the-worst list, with the group having its own fund range which is delegated out to external managers.
‘It has frequently lurked near the top spot in the hall of shame and sits in third position with four funds totalling £4billion’, Bestinvest said.
Schroders came in as the fourth worst-ranked firm, but it has seen an increase in assets to £4billion and its tally of funds has swelled to 11.
JP Morgan has also found its way into fifth place, having previously been all the way down at 45 in the worst-rated rankings.
While the five fund firms above scored poorly, the overall worst performing fund in Bestinvest’s latest list was the M&G North American Value Fund, lagging its sector by 42 per cent over the period in question.
Here, an investor would now have £107 after investing £100 three years ago – a minute return compared to the better performers in the sector. The GAM North American Growth Fund has also performed poorly, 40 per cent below its sectoral average over the three-year period.
Bad dog (still cute though): The overall worst performing fund in Bestinvest’s latest list was the M&G North American Value Fund, Bestinvest said
The Legg Mason IF ClearBridge Global Equity Income fund leaked value in absolute terms as well as lagging its rivals by 39 per cent.
Looking at the broader picture, some fund areas appear to be more prone to becoming consistent ‘underachievers’ than others.
Some 38 poorly ranked funds are in the global equities sector, while a high number of North America funds also scored poorly.
Any bright spots?
In better news, dog funds that invest specifically in smaller companies ‘appear to be an extinct breed’, Bestinvest said.
Bestinvest added: ‘While many of the funds in Spot the Dog are Chihuahuas, with a third of the funds identified being less than £100million in size, 15 funds are classified by Bestinvest as Great Danes, each of which has over £1billion of assets.
‘These include funds that are widely held by private investors and managed groups such as Invesco, St James’s Place, Schroders and Hargreaves Lansdown.’
The news is also fairly good for UK-focused funds.
Not so dog tired now, hey? Pedigree fund picks in UK All Companies, according to Bestinvest
Pedigree v doghouse: Selected UK All Companies’ fund performance examples since December 2015
‘In the latter part of 2020, optimism about Covid-19 vaccines helped drive a rally in some of the more economically-sensitive parts of the UK market that had earlier taken a beating’ Bestinvest said.
‘This led to a reversal in the fortunes of some of the funds that experienced a particularly tough first half of 2020, enabling tem to escape from our kennel.
‘This has resulted in a far improved picture in this edition with just seven UK All Companies funds meeting our dog criteria’.
The Liontrust UK Ethical fund was a very strong performer, providing a relative three-year return of 37 per cent.
The LF Lindsell Train UK Equity fund and the TB Evenlode Income funds were also good performers.
My returns are dire – what should I do?
Well, your first instinct might be to panic. But it’s better to take time to delve deeper into how your funds are working (or not) for you and think about where you may want to shift your cash.
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 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 so it is essential to choose funds very carefully and then keep a beady eye on them or opt for low-cost trackers instead.
How to research investment funds and trusts
‘The latter won’t beat the returns of market but will closely mimic them.’
Mr Hollands stresses that it can be more difficult than you think to identify a ‘dog fund.’
He said: ‘Recognising that you might have your money invested in a dog-fund is not as straight-forward as you might think.
‘While 32 of the funds in the report actually lost investors’ money over the last three-years – the worst by 42 per cent – 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.
‘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.”
‘Of course, the past is not the future and there can be times when it might be worth hanging on.
‘For example, if a new manager with a better track record has recently been put in charge, or because you believe an approach that has been out of favour is about to make a come-back.
‘However, if you really cannot find a convincing reason to stay put in an investment also-ran then moving elsewhere could give your Isa or pension a new lease of life.’
Be mindful of any fees involved when picking a new fund to plough your cash in and make sure you regularly monitor its performance.
And, in a final takeaway, remember that today’s Crufts winner could end up being tomorrow’s ‘dog’.
TOP SIPPS FOR DIY PENSION INVESTORS
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.