Too many investment funds are badly managed

The retail investment fund management industry has done Brits proud over the years. It’s helped many of us become (seriously) richer by investing our pensions and individual savings accounts (Isas) wisely in vehicles such as unit trusts and open-ended investment companies (Oeics). It’s a British success story – and let’s be honest, there aren’t many of those around. Rejoice.

At the last count, the sector managed assets totalling £855 billion, making the UK the second largest investment management centre behind the US. And that big sum doesn’t even take into account the £110 billion that the investment trust industry manages on our behalf.

Investment trusts have looked after our money for longer (since 1868) and far more successfully (bar the unfortunate split capital debacle of the late 1990s).

Yet, this ‘success’ doesn’t mean that everything is hunky dory in retail fund management. Far from it. As in all industries, there are always areas for improvement.

To cut to the chase, we need to be given an overall better deal, whether in terms of the charges we pay on the funds we invest in, or the way our investment funds are managed.

Some funds are too expensive, while others don’t actually deliver what they promise you on the tin (they’re a fraud).

In some ways, retail fund management is a victim of its own success. The move towards more people investing their own money – online, through Isas and self-invested personal pensions – has spawned the birth of ever more fund providers wanting to get in on the act and far greater fund choice.

Insurers and banks are now all at it – as well as investment houses set up purely to manage people’s money. At the last count, there were more than 2,600 investment funds available for us to invest in.

This increased choice is great on the surface (competition and all that), but it doesn’t mean it has helped raised the quality bar. Too many investment funds are still managed poorly – and, sadly, too many people continue to buy them, either because their bank strong-arms them into it or they are unable to distinguish the fund dross from the gilt-edged.

For example, some 188 investment funds are classified as UK All Companies – funds investing in the UK stock market. Most are actively managed (have a professional manager at the helm who makes the investment decisions) and invest across the market in blue chips as well as lesser known companies. Others track either the performance of the FTSE 100 or FTSE All Share indices (these are run by complex computers, ‘robo’ managers).

Over the past five years*, this collective band of UK All Companies funds has delivered an average performance of 40.1%, better than the FTSE All Share(34.3%).Yet the average hides the ‘dross’.

A couple of active funds – Scottish Widows UK Select Growth (Lloyds Banking Group) and Halifax Special Situations – have somehow managed to lose investors’ money over this period, recording losses of -8.7% and -3.9% respectively.

Other bank- managed funds (again managed actively) have failed to beat the FTSE All Share, such as Halifax UK Growth (28.4%), Santander UK Growth (23.8%), and Scottish Widows UK Growth (18%). Sadly, none of these – Halifax UK Growth (£4.5 billion), Santander UK Growth (£869 million) and Scottish Widows UK Growth (£2.4 billion) – are minnow funds.

People continue to be sucked into them because of the persuasive sales patter of the banks.
What make this worse is that they are not being properly actively managed. For example, Scottish Widows UK Growth is a closet tracker – mimicking a FTSE 100 index tracking fund, but underperforming and charging the proverbial earth in the process.

Thankfully, the regulator is on to this and has reminded the industry that it must not dress up mutton as lamb. Active funds must be managed actively, not in line with an index. So when fund hunting, ignore those ‘managed’ (I use that term loosely) by the banks. Instead, seek out those where the manager uses their stock-picking skills to add value.

Plenty of websites will help you find these stars - including Moneywise, with our funds and investment trusts comparison tool serving as a great starting point.

Put the great back into your investment portfolio. Bon chance.

Read Jeff Prestridge's views on why you shouldn't rely on the new state pension to fund your retirement or why saving cash is a poor choice in the long run.


Alternatively, you can read all of Jeff’s previous columns here