INVESTORS are holding almost £55 billion in poor-performing funds, according to research from Bestinvest, the online investment service. The company has spotted 111 so-called dog funds, up from 58 just six months ago and a four-fold increase on the 26 funds identified in February 2018. The current list includes funds managed by well-known firms including Fidelity, Invesco and Schroder.
A fund is named and shamed as a dog if it has delivered worse returns than the market it invests in for three consecutive years, and by more than five per cent over the entire three-year period. The filters are used to distinguish consistent poor performers from funds that have suffered a short-term blip.
The dogs include some of the most popular funds and the bedrock of many pensions and Isas, such as Invesco High Income, which has assets of almost £8 billion. The LF Woodford Equity Income fund, which has almost £5bn of assets and is managed by Neil Woodford, one of the UK’s best-known fund managers, is in the dog house for the first time. The fund has lagged its benchmark index by 28% over the past three years. If you had invested £100 in the fund three years ago, you would now have £87.
The Woodford fund has also made its first appearance in Chelsea Financial Service’s DropZone, a list of ten funds that have underperformed their sector averages by the biggest amount over a three-year period.
Sam Slator, head of communications at Chelsea Financial Services, said: “Some, like myself, have lost patience and are no longer invested in the Woodford fund. In my view, there are a number of excellent alternatives available, such as Threadneedle UK Equity Income and Marlborough UK Multi Cap Income. Others have more faith in manager Neil Woodford being able to turn his performance around. He does, after all, have a very good long-term track record.”
If investors lose out as a result of poor performance, fund managers apparently do not. Bestinvest estimates that managers are raking in £537 million in annual fees from the dog funds.
Jason Hollands, managing director of Bestinvest, said: “The management companies of these funds have collected lucrative fees for plodding behind.”
UK funds dominate the list of dogs. Out of 290 funds that invest in UK companies, 59 were classed as dogs, which equates to more than 20% of the total. Others in the dog house include Jupiter UK Growth, Invesco Income and Fidelity MoneyBuilder Growth.
Many of the poor performing UK funds invest heavily in medium-sized companies, which have been hit particularly hard over the past few years, partly as a result of Brexit uncertainty. A high proportion of the dog funds also invest in companies that generate dividends, usually tobacco firms, financial companies and utilities, all of which have had a tough time of late.
But the market conditions should not let the managers get off Scot free with persistent poor performance, according to Mr Hollands.
“While there are some mitigating factors, this is not to say that all these funds should be let off the hook,” he said.
“There are best of breed managers operating in the same markets who have nevertheless managed to deliver significantly higher returns. It is therefore vital for investors to choose their funds very carefully.”
For example, TB Evenlode Income climbed ahead of its market by 13% over three years, turning a £100 investment into £135.
Should you sell a dog fund? Hollands said: “Investors who own a dog fund should carefully consider whether to stick or potentially switch elsewhere. Funds can come bouncing back from rough patches and action may already be underway to improve performance, such as the appointment of a new manager, so it is vital to do some research before acting.
An alternative is to invest in a tracker fund, which follows an index.
Laith Khalaf, senior analyst at Hargreaves Lansdown, a financial adviser, said: “If you’re not willing to take the risk of active manager underperformance, then you should simply invest in index tracker funds.
"These will slightly underperform each year because of costs, but charges are pretty low on many of these funds so it’s possible to minimise this effect.”
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