19th July 2014
Savers have nearly £20 billion sitting in underperforming funds, the latest ‘dog’ report from Bestinvest reveals.
The twice yearly Spot the Dog report has highlighted 49 underachieving funds containing £19.55 billion of investors’ assets. Funds fall onto the ‘dog’ list if they underperform their benchmark three years in a row and by more than 10% over three years.
Although the number of serial dog funds has dropped from 53 to 49 in the past six months there is still a considerable about of money being held in the funds.
M&G funds make the dog list three times, holding a total £10.7 billion and 55% of the assets held in dogs overall. It is the second time M&G has been topped the dog list. The £6.7 billion M&G Recovery fund, the M&G Basics fund holding £3.1 billion and M&G American with £942 million have all underperformed.
Other companies in the dog house include Schroders and Neptune, both of which have three funds in the list, although M&G holds the top slot when ranked by assets.
Jason Hollands, managing director of Bestinvest, said the M&G funds inclusion on the dog list would ‘raise eyebrows’.
He said the ‘jury remains out’ on M&G Global Basics, which was taken over from Graham French by Randeep Somel last year.
‘This is an unconstrained thematic global equities fund, which invests in a fairly concentrated portfolio of companies. It’s suffered over the last three year years from exposure to emerging markets and resources companies which have had a torrid time,’ said Hollands.
‘In the medium term its fortunes are likely to be intertwined with these parts of the market.’
Hollands said the fund at the top of the list, the M&G Recovery fund, had delivered disappointing returns since the financial crisis.
‘The brief of the fund is to invest in unloved companies and the approach is inherently long-term, but having underperformed in four of the last five 12-month periods, investor’s patience is being seriously tested,’ he said. ‘The run of underperformance is particularly disappointing given half the fund is invested in small and mid-cap stocks, parts of the market which have generally performed well in recent years.’
Fund firm Schroders has taken issue with the inclusion of one of their funds saying it is mostly institutional.
Robin Stoakley, Managing Director, UK Intermediary at Schroders says: “Once again we are very disappointed by the analysis undertaken by BestInvest for the Spot the Dog report and its insistence on keeping the Schroder QEP Global Active Value fund in the report. By doing so BestInvest has failed to recognise that the fund’s client base is overwhelmingly Institutional. Less than 1% of the fund, only £32m of the £3.2billion is held by retail clients. We believe the report is misleading and does not give a clear representation to the UK market –points we have made to BestInvest on a number of occasions.
“As we have stated before the typical holders in this fund are pension schemes which make long term allocations to a variety of complementary styles – of which value is just one. While the long-term rewards of value investing can be significant, the pattern of relative returns is, by its very nature, uneven. The last four years have been challenging for active value investors in general and whilst the fund is no exception to this, it is not the worst performer in its sector. In fact over a three year period the fund has performed better than two of the funds on the BestInvest ‘Pedigree Picks’ list and over a five year period it has performed better than all of the funds on the ‘Pedigree Picks’.
“Schroders’ overall investment performance remains very strong and ahead of our target with 74 per cent outperformance over one-year at the end of March 2014.”
The Investment Management Association’s global sector contains the most dog funds with 20 funds representing 16% of the sector.
North America also contains a number of dog funds and represents 13% of the underperforming funds on the list, although the figure is reduced from 22% six months ago.
Bestinvest said the figures confirmed ‘the reputation of the US as a market where the failure rate for active fund managers is high’ and noted that no European ex UK or UK equity income fund was identified as a dog.
Bestinvest said one of the biggest shocks of the report was the inclusion of veteran fund manager Harry Nimmo’s Standard Life UK Smaller Companies fund. Nimmo’s focus on quality growth companies has long been popular with investors but Hollands said ‘the problem has been the style being out of step with prevailing markets’.
‘Smaller companies can add a real kick to a portfolio, but it’s an area where we feel small-sized funds have added flexibility in their ability to fish further down the company spectrum and in terms of trading liquidity,’ he said.
As the New ISA offers an allowance of £15,000 and stockmarket indices hovering around all-time highs, equity investing is becoming more popular. However, Hollands warned investors to do their homework and ensure they do not put up with weak performance.
‘The difference in performance between funds within the same sectors can vary enormously, so it is vital to be very selective when making your choices,’ he said.
‘Many investors put up with weak or pedestrian performance by either not monitoring their investments regularly, receiving poor service from the adviser who originally recommended the investment or through simple inertia.’
He added that this is a problem that ‘is exacerbated when markets have risen strongly…as it is easy to assume that because the value of your investment has increased, that all is going well and the manager is doing a good job’.