Chelsea reveals the latest underperforming funds in its RedZone and DropZone

24th June 2013

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The latest analysis of poorly performing funds has identified the Manek Growth fund as the worst performing retail fund over the last three years with the fund returning 52.98% less than the sector average.

The Manek Growth fund is the first of ten funds in what Chelsea calls its DropZone*. Others include the UBS Smaller Companies at second and HEXAM Global Emerging Markets third, each underperforming their own sector averages by 37.97% and 35.67% respectively.

Arguably of more concern, there are 146 funds and £34 billion in the RedZone, one zone above the Drop Zone.

In a note Chelsea says: “While the British economy has narrowly avoided a triple dip recession, far too many British funds have not avoided a triple dip, with no fewer than 146 funds, with combined assets under management of more than £34 billion, in the wider Chelsea RedZone. These funds have all had third or fourth quartile performance over the last three consecutive years.

Legal & General and SWIP have a large number of funds in the RedZone. Legal & General have nine, though they are closely followed by JP Morgan (seven), with Scottish Widows and Fidelity in joint third, with five apiece. When it comes to investors’ assets, however, Scottish Widows is by far the worst, accounting for more than a third of the assets in the RedZone at £12.74 billion, as their funds are so large.

Next in the list is Legal & General with £2.5 billion and State Street with £2.06 billion, most of the latter being money invested in the expensive (1% amc) Virgin UK Index Tracker, which they run.

Almost half the poorly performing funds in the UK All Companies sector are trackers. The sector with the largest number of poorly performing funds is UK All Companies (26), followed by Mixed Investments 20-60% Shares (20) and Global (14). More than one-third of the funds in the UK All Companies sector are actually passive funds and account for almost half (45%) of this sector’s RedZone assets and 20% of the total.

In its release, Chelsea says that the RedZone isn’t an exact science, based as it is, almost exclusively, on quantitative analysis. However, it is designed to bring to investors’ attention those funds which are consistently underperforming and therefore warrant at least a review, if held in their portfolio. “At times though, we think it necessary to highlight areas where we believe there to be extenuating circumstances,” says Chelsea managing director Darius McDermott.

“This time round, we think a couple of multi-asset fund ranges, which find themselves in the list are worthy of mention. The first are three funds from Fidelity, managed by the very experienced Trevor Greetham: Multi Asset Defensive, Growth and Strategic. The issues with performance have been caused by the markets moving very quickly and as a result of political and central bank intervention, rather than market fundamentals. As markets have started to behave in a more conventional way in 2013, the performance of these funds has started to improve.

“The second range is that of Legal & General Multi Manager, run by Alan Thein and Tim Gardner. These funds have suffered from a large position in gold and gold mining equities, which have served as a hedge against the unprecedented amounts of monetary easing by world central banks.”

In terms of the the DropZone, Chelsea says there are just under £650 million assets in the DropZone. Chelsea says less than a tenth are in the worst three funds. Eight of the ten are equity funds, which are joined by one property fund and one bond fund.

Chelsea has also provided a detailed explanation about the bond fund. “The latter is the City Financial Strategic Gilt fund and the underperformance is due to the manager believing that the whole asset class is grossly overvalued. With gilt yields close to 300 year lows he thinks prices will fall quite dramatically when yields normalise, leading to inevitable capital losses. As such, the fund is positioned to avoid heavy losses when this situation unfolds. We actually agree that gilts look overvalued and the risk to capital, once interest rates start to revert to normal, could be significant. This has been a bold position that has hurt performance, but may well serve investors well as QE is unwound in the US. Since Ben Bernanke first warned the markets he may start slowing monetary easing on 22nd May, the fund is down 0.2%, compared with the sector average of 1.5% as at 20th June.”

The DropZone
Position Fund % underperformance from sector average
1st Manek Growth 52.98%
2nd UBS UK Smaller Companies 37.97%
3rd IM HEXAM Global Emerging markets 35.67%
4th Aviva Inv Property Investment 30.87%
5th Templeton Global Emerging Markets 28.05%
6th F&C High Income 27.79%
7th Legal & General Growth 26.67%
8th JP Morgan European Smaller Companies 23.67%
9th Marlborough UK Income & Growth 23.33%
10th City Financial Strategic Gilt 21.96%

How the Zones are calculated

Chelsea RedZone

The Chelsea RedZone names and shames the worst-performing funds over the last three discrete years. Each fund in the list has produced 3rd or 4th quartile returns each year. The full list of funds in the RedZone can be found at: www.chelseafs.co.uk/redzone

*Chelsea DropZone

The Chelsea DropZone brings funds to your attention which are from the RedZone and have underperformed their sector averages by the largest amount over the cumulative three-year period – in this case the three years to 30th April 2013.

All the data is sourced from FE Analytics,  % change, bid to bid, total return net income reinvested, three years to 30.04.2013. Whilst every effort is made to ensure the accuracy of this information, Chelsea Financial Services takes no responsibility for any errors, omissions or inaccuracies contained therein.

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