In total, six funds with combined assets under management (AUM) of more than £1.3bn have fallen short of both measures between 2011 and 2013, though Geffen and Avigdori’s funds make up the bulk of this figure.
Source: FE Analytics
All of the funds, with the exception of ConBrio B.E.S.T Income General, take the All Share as their benchmark. The portfolio does not list a comparative index.
Of all of the funds mentioned, SWIP UK Income and Ignis Enhanced Income have the worst records over the three years, both delivering bottom-quartile returns between 2011 and 2013.
It should be noted that the Ignis fund’s primary objective is to deliver an above-average yield, which it does through using call options. Its objective reads: “To provide a high income with some long-term capital growth.”
FE data shows that the fund is currently yielding 5.24 per cent, which is well above the IMA UK Equity Income sector's figure of 3.87 per cent.
The SWIP fund, which is more of a traditional capital growth portfolio, is currently yielding 3.8 per cent. Three SWIP funds featured in a previous study, which looked at funds with more than £1bn under management and that were bottom-quartile performers in 2013.
A spokesperson said the group prefers comparisons with the funds' benchmarks instead of their peers.
Our data shows that as well as underperforming its sector average, SWIP Income has failed to beat its All Share benchmark since 2004 – that’s eight consecutive calendar years.
The Conbrio fund has underperformed in every calendar year since 2007. It was launched in 2006.
BlackRock UK Income has been run by Avigdori since November 2009, and he was joined by Mark Wharrier late last year.
Between 2007 and 2013, the vehicle was co-run by Nick McLeod-Clarke.
Avigdori accepts that performance hasn’t been up to standard over the last three years or so, but is confident that the recently revamped team will deliver over the long-run.
“We recognise performance has been challenged and we remain totally committed to delivering alpha for our clients,” he said.
“To this point, we have a dedicated UK income team, which was bolstered last year with the arrival of Mark Wharrier as co-manager of the fund in September.”
“Together we have evolved the investment process to focus on companies which have the best yield and free cash flow, with a focus on growth and turnaround opportunities.”
“We are very encouraged to see early signs of the strategy working and are excited to build on that in the coming months and years on behalf of our clients.”
FE data shows that the BlackRock UK Income fund has returned 8.49 per cent since the beginning of September last year, putting it slightly ahead of its sector and benchmark.
Avigdori adds that the fund has one of the longest income records in the IMA UK Equity Income sector, and has produced dividends at a lower rate of volatility than the average fund.
Geffen, who has run the Neptune Income fund since its launch in December 2002, was unavailable for comment.
Inevitably, all of the funds in question have underperformed the sector and index over a three-year period, the worst being Ignis UK Enhanced Income, which has returned 17.61 per cent.
Performance of funds, sector and index over 3yrs
Source: FE Analytics
All are bottom quartile over three years, and with the exception of BlackRock Income, all are bottom quartile over five years as well.
Neptune Income is the only fund that is as high as the second quartile over a 10-year period, although it is still slightly behind the IMA UK Equity Income sector average and FTSE All Share index.
Performance of fund, sector and index over 10yrs
Source: FE Analytics
Selling out of funds after a period of underperformance is often the very worst thing to do, as the style of certain managers can be out of fashion for many months or even years.
In many cases, funds follow up strong bursts of underperformance with strong performance and vice versa, and so simply selling a fund because it has fallen behind its sector and benchmark is unadvisable.
Under Fidelity Special Situaitons, for example, Sanjeev Shah’s value bias – which included a lot of exposure to UK banks – came under a huge amount of scrutiny in 2010 and 2011. However, the fund has had a stellar run over the past two years and is in the top decile of its IMA UK All Companies sector.
Ben Willis (pictured), head of research at Whitechurch Securities, agrees that funds should not be sold on past performance alone; however, he says at times investors have to recognise that enough is enough.
“It’s a difficult one – the sector is very tightly contested and so there are always going to be winners and losers. However, in the UK Equity Income sector in particular, I think there is enough information out there to help you find funds with a similar style that have done much better,” he explained. “If a fund has a very specific focus – for example, it invests purely in mega caps – then you can understand why it may have been out of favour. However, the sector is strong enough for you to find an equivalent that is doing a better job.”
He says that a change in managers, as in the case of BlackRock UK Income, is an encouraging sign as it shows that the group is actively addressing the issue.
He says that Geffen’s bias towards companies with emerging markets exposure has worked against him of late, and points out that Ignis UK Enhanced Income’s use of call options means that it is always likely to fall behind strong rising markets. That said, it did also fall behind its sector and index in the down year of 2011.