Number of ‘dog funds’ underperforming benchmarks soars

The last six months has seen a more than 27 per cent jump in the number of investment funds described by analysts as ‘serious and persistent underperformers’, research reveals. 

BestInvest’s latest ‘Spot the Dog’ report shows a combined £46.2billion of savings are withering in so-called ‘dog’ funds, up a whopping 142 per cent since February’s total of £19.1billion. 

There are thousands of funds on offer to UK investors across a variety of asset classes, sectors and regions, making it difficult for the average DIY fund buyer to work out the best place to park their cash.

But twice a year Bestinvest names and shames underperforming investment funds, with the investment platform’s ‘Spot the Dog’ report revealing which funds belong in the dog house and which have exceeded expectations.

In the dog house: Bestinvest has published its list of ‘dog funds’ which have underperformed the benchmark over 3 years 

Which big name funds are in the dog house?

The report reveals that 56 equity funds have been identified as ‘serious and persistent underperformers’, a 27 per cent increase on the 44 funds named in February’s report.

The investment giant with most vehicles in the list is St. James’s Place with six funds on the list, twice as many as any other individual fund group. 

It currently has £29.3billion held across these funds, 63 per cent of the total dog fund assets in the survey. The second worst performer, Artemis, has just 5.8 per cent.

There are three SJP funds from the global sector – Global Quality, Global Growth and International Equity – as well as two European and one emerging market fund.

Artemis has three dog funds, namely its two US funds – North America and North American Smaller Companies – largely because they’ve been underweight Apple, Nvidia and Tesla, and were exposed to the now-defunct First Republic Bank. 

Its Global Select fund is also on the list.

Other notable inclusions are Columbia Threadneedle which has four funds on this year’s list, with combined assets of £1.9billion, and abrdn which has two funds on the list, down from three in the last report.

BNY Mellon and M&G dodged the list entirely, while Baillie Gifford had just one fund on the list.

How does a fund get labelled a dog?

Global stock markets have enjoyed a better year than last year, but the biggest gains have been made by megacaps – or the world’s largest companies – that have benefited from interest in artificial intelligence.

While more global funds have entered the dog house, Bestinvest doesn’t name and shame a fund just because there’s been some market volatility.

Instead it looks at funds that have a more deep-rooted problem to address, rather than just a short-term wobble. To qualify as a dog, a fund must have delivered a worse return than the market it invests in for each of the last three years.

This rules out those that have just had a bad year, but it is worth noting that many experts prefer to judge funds on their five or even ten-year performance.

Secondly, a fund must also have underperformed the returns delivered by the market by more than 5 per cent over the three-year period under review.

It only looks at funds that have share classes open to retail investors, taking out those only accessible to institutional investors.

Which funds have done particularly badly?

Global funds are in the kennel of shame, with 24 funds making the list up from 11 funds last time. It represents 15 per cent of overall assets in the sector, up from 3 per cent last time, equivalent to £32.14billion.

Global funds have had a rocky ride as the benchmarks came to be dominated by the US and technology. Bestinvest suggests many managers have been wrongfooted by 2022’s selloff and then again in 2023, with big technology names and the US market coming out top again.

St James’s Place funds make up £26.05billion of this, with its £11.47billion Global Quality fund, £7.09billion Global Equity and £7.49billion Global Growth funds making the list.

Other big names include Columbia Threadneedle’s Responsible Global Equity fund, one of a number of responsible/sustainable funds on the list. 

Also shamed are FP WHEB Sustainability Fund, Jupiter Global Sustainable Euqities Fund and the Sarasin Responsible Global Equity fund. 

While the exclusion of fossil fuels may have been a drag on performance last year, Bestinvest says it should not have made the difference between a good and bad fund.

There were five UK All Companies funds, just 3 per cent of the overall market, but it still accounts for £3.4billion of assets.

Scottish Widows UK Growth has been a ‘repeat offender’ say Bestinvest, showing ‘no sign of better behaviour’. Other funds include The Unicorn Outstanding British Companies fund, which has struggled with its higher weighting in small and medium-sized companies, Trojan Income and AXA Framlington UK Sustainable Equity.

The Invesco UK Equity High Income is now out of the dog house having ‘responded to the discipline imposed by new managers Ciaran Mallon and James Goldstone.’

Which funds are a better breed?

Some sectors are better-behaved than others, with Japan’s smaller companies and emerging markets having just one or two dog funds to their name.

After trailing its international peers, Japan has seen somewhat of a revival this year. A slump in the Yen has boosted the competitiveness of Japanese exports and the value of overseas earnings for Japanese companies.

The £183million T Rowe Price Japanese fund, which made the list, makes up 1 per cent of overall assets in the sector. Bestinvest says its growth approach has not found favour.

There were also no global equity income funds on the list this year because of the revival in dividend investing.

What to do with your savings if they’re in a dog fund

While the report highlights some of the worst performing funds, it is not a list of funds that should be sold automatically because past performance is not necessarily a guide to how well the fund will perform in the future.

Jason Hollands, managing director of Bestinvest said: ‘Of course, every fund manager will go through weaker periods – whether that is a run of bad luck, or they are sticking to a style or process that may be temporarily out of fashion. 

‘Identifying whether these are short-term or structural factors is key and investors should ask some questions before deciding to stick with a fund or switch.

‘Things to consider include whether a fund has become too big, which might constrain its agility, or if there have been subtle but important changes in the management team. 

‘Also, is the manager straying from a previously successful approach or are they now too burdened with additional responsibilities?’

This post first appeared on Dailymail.co.uk