Bestinvest’s New ‘Spot the Dog’ List of Funds Revealed: The 44 misbehaving mutts sent to the doghouse for poor investor returns

It was undoubtedly a very tough 12 months for the markets in 2022, which were rocked by a myriad of global challenges from the war in Ukraine to tearaway inflation, soaring energy prices and rising interest rates. Private investors will undoubtedly understand the dampening effect these events may have had on their portfolio, but they will be less accommodating if they then discover their investments have performed even worse than the markets their funds invest in.

While Spot the Dog – the twice-yearly report produced by online investment and coaching service Bestinvest - will never punish a fund just because markets are going through a rough patch, it does highlight the misbehaving mutts whose poor performance is more deep-seated than a short-term wobble. Funds in the report have consistently underperformed relative to their relevant market index.

In the latest edition of the report, 44 equity funds have been identified as serious and persistent underperformers, up from 31 in the last report. More worrying, however, is the size of the big beasts featuring in the pack with the amount of assets held in these mutts up 78.5% to £19.1 billion from £10.7 billion in our last report in August.

Interestingly, the UK equity sectors were home to the largest share of misbehaving mutts, despite the strong performance by the UK market’s big, international blue-chip companies last year. The rising number of UK funds in the kennel was in large part caused by funds with weightings to medium-sized and smaller companies.

The spotlight also falls on the six Great Danes (funds with assets over £1 billion) featured in the list this year – double the three in the last edition of our report. The growth in the number of outsized canines is very concerning as they account for 70% of the assets held in dog funds and highlight that investors are leaving their money with managers whose investment approach is deeply out of step with the markets.

However, some recognition needs to be given to the fact that 2022 was a very turbulent year. The increase in the number of overall funds listed is a stark reflection of the challenges faced with funds previously flattered by the low interest rate / low inflation environment that followed the financial crisis suddenly becoming very exposed by the inflationary pressures that emerged in 2022. It’s very hard to hide when the markets are suddenly contending with runaway inflation that forced central banks to aggressively raise interest rates causing a painful adjustment in the financial markets.

Factors exposing more funds to the doghouse included managers that had relied on a handful of growth stocks rising indefinitely who were then faced by a dramatic sell-off, as well as those who took risks on highly indebted or ‘blue sky’ companies before valuations adjusted to a new monetary policy environment.

Meanwhile, ‘value’ investing – particularly areas such as mining and energy – made a comeback and dividends suddenly became more important for investors again – something considered old-fashioned in recent years. While those fund managers that weren’t paying attention to these trends then received a rude awakening, those very same factors helped to lift some former laggards out of the kennel.

Jason Hollands, Managing Director of Bestinvest, the online investment and coaching service, said: “We have been producing Spot the Dog for more than a quarter of a century, naming and shaming consistently underperforming investment funds to help investors take stock of their portfolio. The aim of the guide is to encourage investors to regularly check how their investments are performing and to assess whether action is required.

“Every fund manager will have moments of weakness during their careers: they may have a run of bad luck, or their style and process may be temporarily out of fashion. It is vital to identify whether these factors are short-term or structural, which is why asking some key questions when taking stock of a particular fund in your portfolio is so important. Questions to consider include: have there been subtle but important changes in the management team? Has a fund become too big, which might constrain its agility? Is the manager straying from a previously successful approach? Are they now too burdened with additional responsibilities?

“Take note, this edition of Spot the Dog includes several former high-flyers and once popular funds that have subsequently fallen on hard times. The difference between the best and worst performing funds cannot be explained by fees alone and ultimately comes down to the decisions taken. This underlines the need for investors to be super selective when choosing actively managed funds.”

Whether it’s former pedigree pooches that have picked up some bad habits, or humdrum hounds that consistently fail to justify their fees, Spot the Dog is here to sniff them out. Here are some further insights from our latest report:

How many funds are in the doghouse?

We have identified 44 funds in this edition that meet our strict criteria* to be labelled a dog fund. While this is a 42% increase on the 31 funds that featured on the last edition in August 2022, it is still about half of the 86 funds revealed in January of last year.

It also remains lower than the 150 identified at the start of 2021. However, it’s worrying that some outsized canines have hit the list, pushing the amount of assets held in in the doghouse up from £10.7bn in our last report to £19.1bn today. And to be included in the current edition, funds have managed to underperform in both markets that favoured ‘growth’ investing and more latterly a recovery in ‘value’.

Which sectors have the most dogs?

The most troublesome pooches are to be found in the UK equities sectors. Assets in dog funds rose to £8.4bn from £5.5bn for the UK All Companies sector and to £3.1bn from £2.1bn for the UK Equity income sector. This is perhaps surprising, given that it was a much better year for highly international, large blue-chip companies found in the FTSE 100 Index. The high weighting in mining and resources companies, negligible exposure to technology stocks, plus the FTSE’s naturally defensive flavour, proved a significant advantage and it outpaced other markets, such as the US, over the year.

However, look beyond the large end of the UK market and it was a tough year for small and mid-cap companies, parts of the market that tend to have greater exposure to the UK domestic economy. The MSCI UK Large Cap Index outpaced the MSCI UK Small Cap Index by more than 20%. Most actively managed UK funds are naturally underweight in the largest companies to avoid over concentration, as the 10 largest companies represent over 40% of the entire market by size. Instead, they tend to invest in the broader stock opportunities in the UK, including both medium-sized and smaller companies. This has historically been the better strategy, with mid and small caps generating higher long-term returns than the largest stocks, but it has been unhelpful positioning over the past 12 months.

The Global sector was the other weak spot. While the number of funds increased only marginally – from nine to 10, the assets in the weakest funds increased from £873.4 million to £4.49bn. The biggest culprits were the St. James’s Place International Equity fund and the HL Multi- Manager Special Situations trust – between them these dismal doggies added £3.9bn to the total.

How many Great Danes featured in this edition?

Halifax UK Growth (£3.2 billion) was the biggest of the six Great Danes (highlighted in bold in table below) with assets over £1bn on our list this year, with Invesco UK Equity High Income (£2.8bn) taking second position and James’s Place International Equity fund (£2.2bn) third - representing a lot of investors’ savings in funds that should be doing better.

The St.James’s Place fund was one of two from large financial intermediaries with inhouse funds on the list of dog funds this year. Thankfully the big beast from St.James’s Place is the only dog from this company on the list this year, an improvement on its recent record, while Hargreaves Lansdown’s £1.8bn Multi-Manager Special Situations Trust was also the investment platform’s only fund to make the list.

Other poorly trained pooches included in that tally of six Great Danes are Scottish Widows UK Growth (£1.8bn) and Halifax UK Equity Income (£1.7bn). These are repeat offenders in many cases, so if the companies won’t act, investors should.

Top 10 biggest beasts by size

Source: Spot the Dog, February 2023  

Which fund groups earned the most dog tags?

HBOS topped the table once again in terms of assets with £4.99bn of assets in three funds, while both Scottish Widows and Columbia Threadeedle were tied in terms of having the most funds at four each.

However, looking underneath the bonnet and it was Schroders who had their paw prints over the largest number of funds. While Schroders only have three very small funds under its own name with £0.185bn in assets, a tiny amount for such a large manager, it also acts as the underlying managers of the Scottish Widows-branded and HBOS funds (both parts of Lloyds Banking Group). That effectively adds another seven funds to its tally and takes the total amount where it has some involvement to £7.5bn. These funds were performing badly long before Schroders got its hands on them, but investors might have reasonably expected a turnaround by now.

Other companies featuring big include abrdn which has three funds on the list, totalling £545.5m. Meanwhile, Invesco has two, worth £2.96bn, and small and mid-cap specialist Unicorn, has three funds on the list this year, worth £474.7m. Credit should go to those companies that featured heavily in the last Spot the Dog, but who may have brought their wayward hounds to heel. Jupiter had three funds last time but doesn’t appear at all in the latest edition. Baillie Gifford avoids the list for now, even after a tough year for its ‘growth’ style, thanks to a strong run before 2022. JP Morgan, BNY Mellon and M&G have all had their unruly canines in the past but are absent from the doghouse this year.

Which were the worst performing beasts overall? 

The worst performers appeared in the global sector where there tend to be the fewest constraints on both style and geography, leading to some quite niche and specialist approaches – which don’t always work out. The FTF Martin Currie Global Unconstrained fund has the unfortunate accolade of being the worst relative performer, with the fund lagging its index by -36% over the three-year period, turning £100 into £91 over the three years.

When it comes to absolute losses, one fund vied for this trophy. The MI Sterling Select Companies fund left investors with just £63 for every £100 invested over the year years, undershooting the index by 22%.   

Top 10 worst performing dogs overall

Source: Spot the Dog, February 2023 

Which fund style won the most rosettes?

There has been a significant style rotation over the past 12 months as interest rates rose across the globe. This has seen a revival for ‘value’-focused managers – those targeting cheap shares - while ‘growth’ managers (those investing in sectors like communication services, technology and consumer discretionary companies) have struggled. As Spot the Dog looks at performance over three years, this year’s results take in periods when both styles have been fashionable. This means fund managers can no longer fall back on style bias as an excuse.

Again, we would highlight the low representation of smaller companies and emerging market funds on the dog list, in spite of very difficult years for both asset classes. This suggests that fund managers tend to do a better job in less researched parts of the market. There was just one emerging market fund (from specialist group Somerset Capital) and only two UK small-cap dogs (the tiny MI Sterling Select Companies and Sarasin UK Thematic Smaller Companies funds). It is also worth noting the lack of Global Equity Income funds on the list, as dividend generating companies proved more resilient at a time when non-yielding growth stocks were hit particularly hard.    

* How a fund becomes a Dog

We only analyse UK domiciled and regulated open-ended investment companies (OEICs) and unit trusts that invest predominantly in equities. We also only look at funds open to retail investors. To make it onto the list, we apply two filters. First a fund must first have failed to beat the appropriate benchmark index over three consecutive 12-month periods, to highlight consistent underperformance. Second, the fund must have underperformed the benchmark by 5% or more over the entire three-year period of analysis – which in this case ends on 31 December 2022.  

Why Spot the Dog can be helpful for investors

With the end of the tax-year fast approaching, the coming weeks are typically the peak season for investors choosing investments in their ISAs and pensions. Deciding which funds should deserve a place in a portfolio can be mind-boggling for DIY investors, which is why this latest edition of Spot the Dog can help narrow the field, as investors may consider ditching the under performers in favour of an alternative.

Investors need to make sure that each part of their portfolio is pulling its weight, so Spot the Dog acts as an essential resource to help savers assess whether their investments are being hounded by terrible returns. This is not to say that savers need necessarily to switch out of a Dog fund, as there may be changes already in motion to turn things around. But anyone holding a dog fund, should certainly consider whether to continue holding it or switch elsewhere.

In addition to this Spot the Dog, Bestinvest also recently published its latest edition of Best Funds List, which features 127 investments including 30 listed investment trusts, 10 exchange-traded funds (ETFs) and 2 exchange-traded commodities (ETCs).

Spot the Dog is not a list of funds that should be sold automatically, it is based purely on factual analysis of past performance which is not necessarily a guide to how a fund will perform in the future. Investments go down as well as up and investors may not get back the amount originally invested. 

This article is solely for information purposes and is not intended to be and should not be construed as investment advice. Whilst considerable care has been taken to ensure the information contained within this commentary is accurate and up to date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.