UK funds in the doghouse as portfolios plunge last year

There are 44 consistently poor-performing investment funds worthy of the name ‘dog’, according to the latest Spot the Dog report from Bestinvest, a 42% increase on the 31 in the August 2022 report.

Altogether, these funds are chewing on £19.1bn of investors’ wealth, up from the £10.7bn recorded six months ago.

With this research, Bestinvest looks at funds that have failed to beat the appropriate benchmark index over the past three discrete 12-month periods and have done so by 5% or more over the entire three-year period to 31 December 2022.

The worst-behaved hounds were found in the UK equity sectors, with £8.4bn worth of assets fed to the dogs funds in the IA UK All Companies (up from £5.5bn) and £3.1bn in the IA UK Equity Income (up from £2.1bn).

This surprised Jason Hollands, managing director of Bestinvest, given that the past year was much better for the international blue-chip companies in the FTSE 100 Index.

“The high weighting in mining and resources companies, negligible exposure to technology stocks, plus the FTSE’s naturally defensive flavour, proved a significant advantage and it outpaced other markets, such as the US, over the year,” he said. 

“However, most actively managed UK funds are naturally underweight in the largest companies to avoid over-concentration and tend instead to invest in the broader stock opportunities in the UK, including both medium-sized and smaller companies. This has been unhelpful positioning over the past 12 months.”

In the IA UK All Companies sector, the funds that suffered the most from this dynamic were Unicorn Outstanding British Companies, whose weighting in out-of-favour sectors such as technology and biotechnology was detracted from performance, and Halifax Special Situations. Both were down 23% over three years.

There were three funds from the Columbia Threadneedle stable – UK Equity Opportunities (down 10%), Select UK Equity (-13%) and UK Extended Alpha (-11%), suggesting that “something is amiss in the group’s UK franchise”, according to the report.

Performance of funds over 3yrs against sector
 
Source: FE Analytics

The IA UK Equity Income sector is home to some ‘old dogs’, whose appearance on the list now “has a sense of inevitability”: Halifax UK Equity Income and Scottish Widows UK Equity Income both managed by Schroders and both losing 8% in three years, are “perennially in the doghouse” and have appeared on the list “in all flavours of market”.

“While only three of Schroders’ own-brand funds make the list, it is responsible for some of the fund industry’s most persistently capricious canines under the Scottish Widows and HBOS brands,” read the report.

“As in the last edition, funds managed by Schroders account for the largest single share of dog fund assets: £7.2bn.”

The list also included Schroder UK Multi-Cap Income (-16%) and the Unicorn funds UK Income and UK Ethical Income, which had the weakest relative performance of the pack (-17% and -18%, respectively). All three have a higher weighting in the under-pressure smaller companies segment.

Performance of funds over 3yrs against sector
 
Source: FE Analytics

UK funds also scored another record by taking up 50% of the top 10 of largest underperformers.

The 10 biggest funds highlighted in the Spot the Dog report

 Source: Spot the Dog, February 2023   

The IA Global sector was the other weak spot. Here, the underperformance was pinned down to the demise of growth, including technology and consumer discretionary giants such as Amazon and Tesla, which experienced a significant sell-off, and of sustainable funds.

These tend to have a growth bias but also exclude fossil fuels, whereas energy and mining companies have been the only major hiding places in tough markets.

“While the number of funds increased only marginally – from nine to 10, the assets in the weakest funds increased from £873.4m to £4.5bn,” noted Hollands.

“The biggest culprits were the St. James’s Place International Equity fund and the HL Multi-Manager Special Situations trust – between them, these dismal doggies added £3.9bn to the total.”

With the end of the tax year approaching, the coming weeks are typically the peak season for investors choosing investments in their ISAs and pensions.

With the latest edition of Spot the Dog, Bestinvest aims to help narrow the field, as investors may consider ditching the underperformers in favour of an alternative.

“Investors need to make sure that each part of their portfolio is pulling its weight, so Spot the Dog acts as an essential resource to help savers assess whether their investments are being hounded by terrible returns,” said Hollands.

“This is not to say that savers need necessarily to switch out of a Dog fund, as there may be changes already in motion to turn things around. But anyone holding a dog fund should certainly consider whether to continue holding it or switch elsewhere.”