Which dogs are in the kennel? Latest Spot the Dog reports 42 seriously underachieving investment funds

But M&G Recovery is finally out of the Dog House!

• Controversial report names and shames investment funds that have underperformed for three years on the trot and by more than 5% over three years
• 42 investment funds available to retail investors found to be seriously underachieving
• The level of assets in the underperforming funds falls to £8.6bn, less than half the number of assets in Dog funds than six months ago
• Fund giant Aberdeen remains prominent with 4 Dog funds, but down from 11 in January 2016
• The area with the largest number of dog funds remains Global with 15 funds
• The area with the second highest manager failure rate remains North America, as it has 9 dog funds representing 17% of the universe
• Prudential-owned M&G is finally out the Dog house – the previous king of the kennel, making up 60% of Dog assets in the last edition, has improved its performance to remove itself entirely from the list
• Schroders, Fidelity and Columbia Threadneedle each have a Great Dane sized fund in the list
• Readers offer: Spot the Dog can be downloaded for free at bestinvest.co.uk/dogs or by calling 020 7189 2400 to request a hard copy

Bestinvest, the consumer champion and execution only online investment platform, has published the latest instalment of its controversial twice-yearly Spot the Dog report, which for two decades has “named and shamed” consistently poor performing investment funds. Investors might be wise to get hold of a copy to check whether their returns are being chewed up by these mutts.

The latest edition of Spot the Dog, which uses data up until 31 December 2016, has identified 42 ‘dog’ funds (unit trusts and OEICs) from a number of Investment Association equity sectors. Each of the funds in the report has met the criteria applied by Bestinvest of being available to retail investors and failing to beat their relevant benchmark over three consecutive 12-month periods and also by 5% or more over the full three year period. This latest edition sees a reduction in the three year underperformance threshold from 10% to 5%, as the report now analyses just commission-free share classes which have lower costs than those that were commonplace in the past. These tough filters ensure the report collars the very “worst of the worst” and that funds which have serially underperformed do not escape as a result of the introduction of lower fee share classes across the industry.

The Pit Bulls in the Pound: Global and North American funds

With 15 funds from the Global equities sector, it remains the area with the largest number of dog funds, as it has been over the past 42 months. However although there are a number of funds included from the sector, a number of them are relatively small funds so only represent 4% of the assets in the sector.

North America is another perennial weak spot, with 9 dog funds in the kennel representing 17% of the universe. The S&P 500 Index has long been a notoriously tough index to beat with 89% of funds (including index trackers) underperforming it over the last five years.

Who are the St Bernard’s of the industry?
In this edition there is no single fund group that dominates the hall of shame. However when ranked by number of funds in the report, the unwanted trophy of ‘Top Dog’ remains with listed fund giant Aberdeen Asset Management yet it only has four funds included in the table, a far cry from a year ago where it had 11 funds included on the list. Let’s hope the improving trend can be sustained.

The fund house with the largest assets under management within dog funds sits with Schroder. This is due to the inclusion of one large fund, its UK Mid 250 fund run by high profile manager Andy Brough. UK mid-caps have been a fertile area of the market in recent years, but despite this, the fund has had a “ruff” ride. Given the size and breadth of Schroders’ range, having just one dog could be regarded as an achievement, as in the main, most Schroders funds are superior breeds.

Two well regarded fund houses that have crept back into the Spot the Dog Guide are Fidelity and Columbia Threadneedle. Fidelity’s £958 million American and £101 million Japan funds are back in the kennel. These funds push the group into second place based on the total value of underperforming assets. These two laggards clearly have a strong bond, as they have featured in Spot the Dog together in the past. The American fund has had a number of manager changes in the last few years, with Aditya Khowala replacing Peter Kaye in September 2015, who seemingly struggled to tame this cantankerous canine during his relatively short tenure on the product. Fidelity Japan also had a change in stewardship with Hiroyuki Ito taking the reins in June 2014. Performance under Ito initially stabilised, although the fund has struggled to add value more recently. Elsewhere, Fidelity funds have fared well and we have singled out a number of pedigree picks over the years.

Meanwhile Columbia Threadneedle owes its place in the doghouse largely to its Threadneedle Japan fund, which has poked its snout into our guide for a second consecutive time. Since our last issue, the company has gone from fifth place to third place due to the addition of a mutt from the emerging markets, the Threadneedle Global

Emerging Markets Equity fund. However, we must cut it some slack as the fund was hugging the benchmark up until a few months ago.

Not all Bad News…

Dog funds remain a rare breed in certain sectors. Not a single UK Smaller Companies fund made it into this edition and only one Europe ex UK fund was identified. Across the UK All Companies and UK Equity Income sectors just six funds (representing 1% of the combined assets in the sector) were identified from an enormous universe of 224 funds.

While many groups will from time to time have an unruly pup in their fund range there are notable absentees amongst fund groups with the key group being Prudential-owned M&G. Only six months ago it had £11.9 billion in dog funds the largest amount from one fund house, and a position it held for four consecutive reports. However relative performance has improved for three of its flagship funds - M&G Recovery, M&G Global Basics and M&G Global Dividend fund, to coax them out of the dog house. Other notable absentee fund groups include: AXA, Artemis, Baillie Gifford, Baring, BlackRock, BMO Global, First State, JO Hambro , Kames Capital, Liontrust, Man GLG and Royal London.

Jason Hollands, Managing Director at Bestinvest commented:

“Legendary investor Warren Buffett famously quipped that ‘only when the tide goes out do you discover who’s been swimming naked’. But since the global financial crisis, ultra-low interest rates and Central bank stimulus programmes have helped push share prices much higher, lifting the value of most stock market funds – even laggards. This has helped to mask some poor decisions from fund managers. Yet so-called bull markets never last forever. If the financial world enters a tougher phase, as it will at some point, the tide will go out and the decisions fund managers make over which sectors or stocks to own could make a very big difference in returns, including between making a profit or loss for their investors. It is therefore important to be selective about who you entrust your money to.

“While fund management companies like to push their star managers and the funds that happen to be doing well at the time, the reality is many of them will have skeletons in the closet that don’t get mentioned in advertising campaigns. When all is going well, funds are heavily promoted and managers are feted like City rock stars. Yet some of these stars may have simply got lucky and turn out to be shooting stars that crash out of orbit. It’s a simple fact that many funds fail to beat their benchmarks over the long run after all the fees have been taken – so investors need to consider their fund managers carefully and keep a beady eye on them. Surprisingly, many continue to put up with weak or pedestrian performance and it’s the fund management companies that benefit. This suffering in silence can be a result of investors not reviewing their investments, a lack of ongoing advice or simply inertia and disinterest. Yet, with many set to rely on the returns the funds they hold in their ISAs and pensions for future financial security, performance really does matter.

“Spot the Dog’s message is simple: no matter how thoroughly you research your choices ahead of investing, the fate of funds and their managers can change over time. Many fail to deliver and you need to monitor your investments closely.”

Readers offer: Members of the public can get a free copy of Spot the Dog by downloading it from www.bestinvest.co.uk/dogs or calling 020 7189 9999.

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Important information:

Please note that Spot the dog is intended purely as a representation of statistical data.

The value of investments, and any income derived from them, can go down as well as up and you may get back less than you originally invested. Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change. This press release does not constitute personal advice. If you are unsure about the suitability of any investment, you should seek professional advice. Past performance is not a guide to future performance.

Different funds carry varying levels of risk depending on the geographical region and industry sector(s) in which they invest. You should make yourself aware of these specific risks prior to investing.