Revealed: The 31 ‘dog’ funds that have consistently chewed up investors’ returns

It has been a difficult start to 2022 for private investors and the last thing they want in times of stock market volatility is to find that their investments have performed even worse than the market. Not least when that investor is paying a fund manager a handsome fee to try and deliver better returns. Yet that is what’s happening with a handful of perennially underperforming funds named and shamed in Bestinvest’s latest Spot the Dog report.

In this edition of the twice-yearly report that fund managers love to hate, 31 dog funds have been identified as serious and persistent underperformers. It is estimated that this current pack of dogs is earning almost £115 million in annual fees based on their current size and annual ongoing costs. The spotlight also falls on a few large funds, which are notable because they are widely held by retail investors and have also featured in successive Spot the Dog lists (while raking in millions in fees in the process).

These are the three funds in the list that have more than £1 billion under management: Halifax UK Growth, Halifax UK Equity Income and Scottish Widows UK Growth. These Great Danes manage a grand total of £6.7 billion on behalf of investors and have been on the dog list for so long that underperformance seems entrenched, and questions must be asked over their approach.

Jason Hollands, Managing Director of Bestinvest, the investing and coaching service, says that:

“While short-term periods of weakness can be forgiven, as a manager may have a run of bad luck or their style may be temporarily out of fashion, there can be more concerning factors at work: important changes in the management team; a fund becoming too big, which might constrain its flexibility or a manager straying from a previously successful approach.

“We have been producing Spot the Dog for nearly three decades in order to raise awareness of the poor performance of many investment funds and to encourage investors to regularly check on how their investments are doing and take action if necessary. While there can be reasons to persevere a little longer with a poor performer – such as a change of manager or outlook – in other cases it may make sense to switch to a different fund with a stronger team and track record.’

In this edition, Bestinvest has identified 31 funds that meet the strict criteria to be labelled a dog fund.[1} This is less than half of the 86 funds revealed in the last report, and the amount of assets held in these mutts has dropped even more substantially from £45.4 billion to £10.7 billion.

Some might find it surprising there aren’t more dog funds given the febrile economic environment and global stock market weakness of the first half of 2022. But the relatively small number of dogs this time round reflects two aspects of the rigorous selection process. One is that performance is measured relative to a benchmark index – so the fund must have underperformed compared to the market it invests in by 5% or more over a three-year period.

A second filter is that the fund must also have underperformed in three successive 12-month periods on the trot.  
 
While there are unfortunately plenty of funds that have undershot the markets they invest in over the last three years, a change in fortune for funds investing in undervalued companies, and dividend paying shares, means many of the funds that dominated the list in recent editions have escaped this time due to a much stronger relative performance in the last several months.  
 
With inflation surging, borrowing costs rising and the war in Ukraine, sectors like energy, commodities, consumer staples and healthcare have had a much better run of performance compared to ‘growth’ sectors like technology, communications services and consumer discretionary companies that previously delivered stellar returns. Many of the growth-orientated funds that have suffered in this most recent year are kept out of the list by their strong performance in the previous two years.

While it is seemingly good news for private investors that fewer funds are earning a dog tag in this transitional and uncertain period for global markets, serious questions must be asked of those funds that still managed to make the list. They have failed to beat the benchmarks used under a variety of market conditions.

Only three funds in the list are ‘Great Danes’, those holding more than £1 billion in assets, and each of these UK-focused funds are repeat offenders over recent years of dog lists. They are Halifax UK Growth, Halifax UK Equity Income and Scottish Widows UK Growth. HBOS and Scottish Widows are both parts of the Lloyds Banking Group and the three funds are advised by blue chip investment giant Schroders. 
 
Also worth a mention is the £807 million Fidelity American fund, which has been in and out of Spot the Dog several times over the years. It makes it into the table of the top ten funds both by size and also the ten worst performers 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 -34% over the three-year period, turning £100 into £94 over the three years.

When it comes to absolute losses, two funds in the list vied for the trophy. The Schroder European Sustainable Equity fund left investors with £82 for every £100 invested over the three years, undershooting the index by -27%, narrowly edging the Jupiter UK Growth fund which reduced £100 to £83 over the same period.

UK focused funds are responsible for a big slice of doggy assets this time, with funds in the UK All Companies and UK Equity Income sectors contributing fully £7.6 billion, or more than 70%, to the £10.8 billion total of assets under canine management. Again, this could seem unexpected as the London stock market has held up reasonably well compared to some of the other major developed markets this year, particularly the US.

But just as the relative stability of the UK market is down to just a few sectors, so there are funds whose approach has not worked well under any of the conditions experienced over the last three years.

The number of global equity income funds appearing on the list has dropped from 14 last time around to zero. Their income-earning mandates dictate low weightings towards growth stocks (which typically don’t pay a dividend) and the US market more widely.

That had been a handicap until recently but has now dragged them out of the doghouse thanks to better performance among value and dividend-paying equities in the last several months.

While the global and global equity income funds on the list amount to less than £1 bn in assets, down from a hefty £18.5 bn in February’s edition, the global sector still contributed 10 of the 31 dogs. Several smaller global pooches are still struggling while many of their larger counterparts remain out of the doghouse - most probably because their performance was boosted by growth sectors and US weightings up until the end of last year.

Schroders’ own-brand funds are largely absent from the list this time but the FTSE 100- listed asset manager is the investment adviser on this edition’s biggest, baddest hounds from HBOS and Scottish Widows: the Halifax UK Growth, Halifax UK Equity Income and Scottish Widows UK Growth funds already highlighted.

It is over two years since Schroders completed the transfer of the funds from Scottish Widows and even longer for the HBOS funds. Investors would be forgiven for expecting to see an improvement in performance by now. The HBOS funds in particular remain some of Spot the Dog’s most persistent offenders and their poor performance has continued through a range of market conditions.

Jupiter has three dog funds in the list this time round, with £774.7 million under management. Admittedly, this is lower than the six funds that appeared last time, but – importantly – these funds are all different to those that appeared last time. This suggests there are a large number of funds flirting with inclusion, even if the names vary. This is worrying for a group that has built its reputation on skillful stock picking.

Jason Hollands, Managing Director at the investing and coaching service Bestinvest, comments:

“Our much-anticipated bi-annual report shows that there’s a big disparity between the best and worst-performing funds that can’t be explained by cost differences alone. 
 
“The exceptional 12-year period of strong equity market performance that came to something of a halt at the end of last year meant that until very recently most funds investing in equities generated gains irrespective of the skill of their managers and this has helped to disguise poor relative performance and bad value for money.

“In a bull market when most funds rise in value with the upward tide, investing can seem all too easy but tougher times are a period to reflect on your approach. If you want to be a successful DIY investor, then periodically reviewing and monitoring your investments is absolutely vital and you need to be super selective in the funds or trusts you choose.

“If all this sounds like hard work and you neither have the time or inclination to research, pick and monitor your own selection of funds, then it might be time to consider taking a different approach. Ready-made portfolios – which are managed and rebalanced for investors – are good options to consider and these days they can also be very cost effective too,’ [2]

Readers’ offer: Bestinvest have launched a Portfolio Health Check service, where an Investment Adviser will talk through your investments and understand your attitude to risk. Following the advice session, a report will be sent with recommendations as to which holdings should be kept or sold, and which new funds should be considered. Normally priced at £495 inc. VAT, Bestinvest is offering a Portfolio Health Check for free to anyone transferring investments worth £50k or more to Bestinvest.  

NOTES

[1] How a fund becomes a Dog  
We only look at the fund universe of open-ended funds (unit trusts or OEICs), and only those available to UK retail investors. To make the list, a fund must first have failed to beat its benchmark 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 30/06/2022.

[2] Ready-made portfolios details

Bestinvest has a wide range of ready-made portfolios to suit investors with different risk profiles and goals. Each is managed to a particular risk and goal profile and adjusted by the team to reflect the market outlook. Bestinvest’s range of five Smart portfolios invest through low-cost passive funds and have ongoing costs of between 0.34% and 0.37%, while its Expert range invest predominantly in best-of-breed actively managed funds, A low account fee of no more than 0.20% applies on all ready-made portfolios, reducing for larger accounts.