Are you invested in a flop fund?

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More than £1.1 billion of investors’ money is tied up in funds that consistently rank in the bottom quartile of their sectors, with bad stockpicking decisions or high fees dragging down returns, according to Money Observer research.

The study revealed that 16 funds have come in the bottom quartile over each of the past three years up to 1 June. Aberdeen MM Emerging Markets, Artemis Capital, Aviva Investors UK Ethical, Axa Defensive Distribution, Axa Framlington UK Smaller Companies, Gartmore UK Alpha, Henderson Asian Dividend Income, Martin Currie Emerging Markets, Standard Life Investments Cash and UBS Absolute Return Bond are the largest duds out of the 16 – all are more than £10 million in size.

Shauna Bevan, investment manager at Charles Stanley, singles out the Martin Currie fund as a particularly weak performer. "With strong contenders in the sector such as Hexam or First State, we would definitely recommend a switch into one of these instead."

Andy Sowerby, managing director of Martin Currie, admits that the firm has been "under-resourced and underinvested" in its emerging markets team.

To combat this, Martin Currie has hired six emerging markets fund managers from rival Scottish Widows Investment Partnership. "They join later this year, and our intention is to build a globally competitive emerging market capability," says Sowerby.

It could take a while for Martin Currie to turn the performance around in the £25 million fund though, as evidenced by other fund management groups that have pulled in new managers to increase returns. Henderson and Gartmore are a case in point.

The Henderson fund was part of the New Star legacy, and had suffered a number of years of underperformance. Last November, Henderson renamed New Star Pacific Growth as Henderson Asian Dividend and installed a new manager, Mike Kerley. Performance is still looking dodgy with Kerley at the helm: in the six months to 1 June it returned just 5.6%, putting it in the bottom quartile. But a Henderson spokeswoman says Kerley has a good track record and it’s too early to judge the fund, as the manager is still fairly new and the fund is adjusting to having an income, rather than a growth, remit. 

Sheridan Admans, investment adviser at The Share Centre, agrees that the fund "could be one to watch under Kerley’s management", and says the fund could in time prove useful for "investors who wish to diversify the source of their income away from the UK and Europe".

Over at Gartmore, Ashley Willing and Simon King were replaced by Royal London manager Leigh Himsworth 10 months ago to help sort out its ailing UK Alpha fund. However, the fund is still suffering: over the past year it returned 14.8% compared with a sector average of 21.8%.

Richard Pursglove, head of UK retail at Gartmore, tells Money Observer that the fund’s performance "was particularly bad" in 2008 and "it’s not in our investors'  interests to allow underperformance like this to continue". He adds: "It has been a volatile time, but Leigh has an exceptional track record from Royal London."

Charles Stanley does not recommend any of the 16 shoddy funds, but Bevan says she is keeping an eye on Gartmore UK Alpha. "Prior to joining Gartmore, Leigh ran top-performing funds for Rensburg and Royal London, so we are monitoring it to see if this success can be repeated," she says. "It’s not currently on our recommended list, but for existing holders it’s probably worth holding."

Meanwhile, Aberdeen is having trouble with its Multi-Manager Emerging Markets fund, which it acquired from Credit Suisse in 2008. An Aberdeen spokesman confesses: "It has been a disappointing performer. In eight of the last 12 quarters, it is in the third or fourth quartile of its IMA sector. 

"The fund size is currently £13 million. On 1 October 2007 it was £20 million, so yes, we have suffered redemptions."

Large holdings in a Russian fund and a platinum ETF took its toll on the fund at the end of 2008. It also has one of the highest total expense ratios in the global emerging markets sector.

Bevan notes: "Clearly, the fund of funds structure and the additional layer of fees has been a drag on performance, and we would strongly recommend to any investors that they invest directly in any or all of the actively managed underlying funds."

This article was originally published in the August issue of our sister publication Money Observer

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