The worst-performing funds over the past three years
While Money Observer's regular Premier League round-up highlights the most consistent high-achieving funds, it's equally instructive to throw a spotlight on the chronic underperformers at the other end of the performance table - and, hopefully, set alarm bells ringing for anyone invested in these holdings.
We have identified the scabbiest of the dog funds: those that have languished in the fourth quartile of their fund sector for each of the past three years to 1 September (in which case they score the full 12 points), or who have managed a third-quartile appearance for one of those years and fourth-quartile in the other two (11 points).
The findings are not reassuring. Of the universe of more than 2,200 funds marketed in the UK, 112 score 11 or 12 points - compared with only 30 this time last year. In total, more than £25 billion is invested in these chronic underachievers.
Jason Hollands, managing director of business development at Bestinvest, suggests that the dramatic rise in failing funds since 2011 may reflect the strong rally in equity markets since June.
"A number of funds will have been caught out by cautious positioning after a dreadful May, for example holding cash balances to meet redemptions rather than being fully invested.
"During a major rally, just being in the market is the best strategy," he comments.
So, which management groups have most egg on their faces? The table features many familiar names. A number, including large and respected management groups such as L&G, JPMorgan, Schroder and Templeton, have two or three funds listed, but successful boutique players such as Margetts and Ruffer are also in evidence.
Clearly, it's unwise to assume from a management group's strength in one area that it will be equally competent in others. However, one group in particular dominates the table. Scottish Widows, which comprises SWIP, SW and Scottish Widows funds and also manages some outsourced Halifax funds, accounts for an embarrassing 16 of the dog investments in the list.
Most significantly, the Scottish Widows stable includes the three largest funds in the failing funds table in terms of assets under management. Scottish Widows UK Equity, Scottish Widows Corporate Bond and SW UK Growth together have an average three-year return of 13% and are collectively worth getting on for £7 billion.
The company explains that its equities business is in the process of being repositioned "to focus on global and specialist active equities (rather than a regional approach) in addition to quantitative equities", and that these three huge funds are among those in transition to the new investment strategy.
In addition, the management of others, including three on the list (SW HIFML Diversified Income, HIFML Diversified Return and HIFML US Strategic) has been outsourced.
This is a familiar refrain. Indeed investors in these funds have been waiting a long time for a turnaround: the Scottish Widows funds were the worst culprits last year too.
In the November 2011 edition we reported that Scottish Widows said "steps have been taken to address such performance issues" and we also reported that SW UK Growth was handed over to a new manager in 2010.
As Hollands points out: "This overhaul of the equities funds doesn't necessarily mean SWIP funds will become top performers - and in the meantime do you really want to wait and see what happens?"
Standard Life Investments too has notched up a clutch of chronic underperformers totalling £1.6 billion, including four UK equity funds.
"We remain confident in our investment process and see scope for significant improvement in fund performance when the market returns to a focus on company fundamentals, which have been overlooked," says a spokesperson bullishly.
For many funds in the list, this level of underperformance means that as well as falling behind their peers they are also losing investors money. Thirty-nine of the 112 culprits delivered negative returns over the three-year period.
Quite a few of those funds are very small: for example, SF t1ps Smaller Companies Growth has the worst performance, down 48% over three years, but it holds just £7.2 million.
Only three of the bottom 10 underperformers are worth more than £100 million. One of those, however - GLG Japan Core Alpha, down 20% over three years - has assets of more than £1 billion.
Another large fund with significant losses over three years is BlackRock's £900 million UK Absolute Alpha. It's particularly shocking to find this fund in the table, embarrassed not only by three years of fourth-quartile performance but by a 9% loss for investors who were expecting positive returns in all market conditions.
A BlackRock spokesperson says: "While we are disappointed with the fund's performance over two and three years, there has been an improvement this year and during the medium and longer term the fund has performed well for investors, returning 4.9% a year since launch in 2005." He also stresses the fund's low volatility.
However, the statistics tell a different tale: with a 0.5% loss in the year to 1 September the fund is struggling to stay above water, and that's before buying and selling charges. Investors have clearly been voting with their feet: since we highlighted its poor show last year, the fund has shrunk by a third from the £1.58 billion size we recorded last year.
It's worth bearing in mind that the performance of some big funds on this list may be dictated by large institutional clients that want a safe, dull and benchmark-hugging investment approach. That is a factor affecting the giant SWIP funds, says Hollands.
But even if that is so, many more continue to operate with the money of private individuals who fail to take action to find a better home for their investments.
The bottom line is that three years of underperformance is in most cases a pretty good indication that it's time to cut your losses. The footnote is that it's always worth delving a little deeper before you switch.
Should you stay or go?
Sometimes there are good reasons not to sell out of funds solely on the basis of past performance tables such as this, and a wait-and-see approach could work in your favour.
"For example, an impressive new manager might recently have been brought in, but not have had time to make a significant difference to performance," points out Jason Hollands. "Or the fund might have a bias to an investment style that's out of fashion but could return to the fore in due course."
Take, for example, the struggling Invesco Perpetual Japan fund. Paul Chesson, head of Japanese equities at Invesco, adopts a valuation- based approach that has skewed the fund towards economically sensitive sectors.
Also, despite the economy recovering share prices have failed to bounce. "With risk appetite low, it has been the companies with more defensive earnings that have performed, but we felt the valuation disparity was too high between these companies and the cyclical areas we favour," he says.
The fund remains focused on compelling valuations and longer-term prospects, in the belief that in due course these companies will enjoy the re-ratings they merit. But existing investors may not be able to take such a longterm view.
This article was written for our sister publication Money Observer.
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An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.