Almost one in ten actively-managed funds is failing investors by consistently underperforming, a damning new report claims.
As many as 77 investment funds – holding around £30billion of our cash – are producing poorer returns than the stock market indices that their marketing literature claims they will beat, the research from wealth manager Bestinvest found.
Investors pay a premium to have their money actively managed by so-called experts. But in some cases, they would have been better off putting their faith in a low-cost fund run by a robot that mechanically tracks the performance of an index such as the FTSE 100 (which is comprised of the 100 biggest companies listed on the London Stock Exchange) or the wider FTSE All-Share Index.
A gamble: Investors pay a premium to have their money actively managed by so-called experts
Bestinvest analysed 910 funds available to ordinary investors. It excluded investment trusts. Those that consistently underperformed it calls ‘dog funds’.
To qualify for the dubious honour a fund cannot simply be going through a bad patch. It must have consistently underperformed the index it is measured against for three consecutive years and have achieved a worse return than its benchmark by at least five per cent over the entire period.
Jason Hollands, managing director at Bestinvest, says: ‘While occasionally it can pay to be patient with a poor performer, if a fund is consistently beaten by the market average, it indicates it may be time to switch. ‘
Do not take it for granted your investments are doing OK.’ He adds that just because a fund is not losing money, doesn’t mean it is well managed. That is because most financial markets are buoyant at the moment so it is not particularly difficult to produce a positive return.
‘Most markets have done really well in recent months as we have started to come out of lockdown,’ Hollands explains. ‘Chances are that even a bad fund has made money – but that is no excuse for it not doing a lot better.’
The report is valuable reading for anyone with a portfolio built around funds, maybe held within a tax-friendly Individual Savings Account or a self-invested personal pension.
It may prompt investors to check that their portfolio remains fit for purpose. Top of the most significant underperformers identified by Bestinvest is global fund Kennox Strategic Value, which has turned £100 into £96 in the three years to the end of June. If investors had simply plotted the global index they would be sitting on £145.
Just behind is GAM North American Growth, which has turned £100 into £112. Tracking the North American index, the same sum would be worth £160. As many as 22 per cent of North American funds were identified as dog funds – the highest of any sector.
Among UK funds, Jupiter UK Growth tops the table of worst performers. It has managed to turn £100 into £76 in three years. The same sum invested in an index of UK companies would now be worth £104. By comparison, Royal London Sustainable Leaders Trust, which is a successful actively-managed UK fund, has easily beaten the benchmark, turning the same money into £137.
The biggest fund in the dog list is the £3.5billion Halifax UK Growth. All this financial clout failed to add muscle to performance as after three years £100 has become £95.
The worst-performing UK Equity Income fund identified is Premier Miton Monthly Income, which has managed to lose £8 over three years for those starting with a £100 investment. The index gained £4 over this period.
Bestinvest also named fund groups it considers to be in the doghouse. Top among them is abrdn (formerly Standard Life Aberdeen), with seven dog funds.
It is followed by Lloyds Banking Group-owned HBOS (Halifax Bank of Scotland) with five, and St James’s Place and Scottish Widows, both struggling on four.
The full report can be downloaded at www.bestinvest.co.uk/ spot-the-dog.
