Don’t get bitten by these 56 funds that have gone to the dogs

The August Bank Holiday should be the moment to kick back before the responsibilities of September kick in.

But investors’ peace has been disturbed by the publication this month of the latest Bestinvest Spot The Dog study which reveals that £46.2billion of the nation’s savings is sitting in funds with shockingly poor performance.

These disclosures are an alert, even if your funds are not among the laggards. As Elliott Silk, head of wealth planning at Atomos, says: ‘If you’re a DIY investor, this is a timely reminder to conduct a regular portfolio review to check that your asset allocation still makes sense for your goals – and your risk tolerance.’

The Spot The Dog study classifies 56 funds as ‘dogs’.

Many of the largest are the global funds which should be the building blocks of a portfolio.

In the doghouse: The latest Bestinvest Spot The Dog study which reveals that £46.2billion of the nation’s savings is sitting in funds with shockingly poor performance

But, in some cases, the managers of these funds appear to have overlooked the excitement about ChatGPT and other generative AI (artificial intelligence) systems that has powered shares in the American tech giants.

The US markets represent 43 per cent of global stock markets, dangerous to ignore, particularly at a moment when they decide to believe in their own exceptionalism, disregarding economic and other concerns.

St James’S Place funds, including the possibly misnamed Global Quality, account for £29.3billion of the Spot The Dog total.

This could undermine the loyalty of even the more forbearing clients of this £4.6billion FTSE 100 listed asset manager.

The other top laggards are Scottish Widows UK Growth, Artemis US Select, Columbia Threadneedle Responsible Global Equity, abrdn UK Smaller Companies and Troy Asset Management Trojan Income. Like the other dog funds (for a full list, see bestinvest.co.uk/investment-insights/spot-the-dog), they have undershot their benchmark by 5 per cent or more over three years, while also failing to beat their relevant stock market in each of those years.

These criteria mean that managers would struggle to describe the results as a mere blip.

In some cases, falling behind can be habitual: over the past decade, Baillie Gifford Global Discovery has returned 106.7 per cent, compared with its sector average of 135.9 per cent. If you had invested £100 three years ago in this fund, you would now be left with just £61, against £147, £126 and £125 respectively in Bestinvest’s pedigree pick global funds – Ninety One Global Environment, Fundsmith Equity and Fundsmith Sustainable Equity.

I have money in the last two of these, partly because of the ready availability of data about their holdings. It is unwise to sell a fund based purely on instinct – or irritation that it is deemed to be a dog.

Silk says: ‘You shouldn’t accept long-term poor performance, but you should try to understand the reasons for it before making a knee-jerk decision that could turn a loss ‘on paper’ into a real one.’

Jason Hollands, of Bestinvest, says: ‘The Spot The Dog study is not a sell list. But it is important now to stand back and look at whether what you own is delivering for you.

‘In the epoch of lower interest rates, when cash was flowing into the markets, even a pedestrian fund could prosper. We are in a new environment of higher interest rates, when there is likely to be more variability in returns.’

Ben Yearsley, of Shore Financial Planning, also argues that this is an era when investors cannot afford to have closed minds – or to shirk their research.

Fortunately this can be done easily online, as he says: ‘The fund factsheets show the largest holdings and the benchmark against which the fund measures itself. The websites of the major platforms – AJ Bell, Bestinvest and Interactive Investor – allow you to compare your funds with others in the sector. They also provide lists of recommended buys.’

Yearsley adds: ‘Don’t dwell on the fund’s past, but on its prospects, seeking to find out why it has struggled, and if its performance is consistently poor, which means it has no place in your portfolio. Why, for example, is an energy fund a disappointment when oil prices have risen since their lows of 2020?’

If you employ someone else to select your funds, Silk suggests you ask this professional why each fund is included since ‘they should all serve a purpose as part of your overall strategy’.

In an ideal world, the managers of the 56 dog funds would contact investors to apologise and provide a recovery plan.

But this will not happen, although the FCA watchdog has this month ordered these firms to justify their fees, amid accusations that some are prioritising their own profitability over returns for customers.

This means that you must be your own consumer champion.

I am subjecting my portfolio to scrutiny, following the precept that you should say goodbye to a fund or share if something better comes along, if its characteristics change, or you are overly exposed to one sector.

Breaking up is hard to do, but there are fewer regrets if it’s an informed choice.

This post first appeared on Dailymail.co.uk