Does your Isa contain one of these dog funds?

Funds and Investment Trusts February 5, 2018 by Tom Bailey

The number of ‘dog’ funds has dipped from 34 to 26, according to Tilney Bestinvest's latest Spot the Dog report. As a result, the amount of money held in serial underperformers has also decreased, from £7.6 billion to £6.4 billion.

In the biannual report Bestinvest named 26 funds, some of which are run by the UK’s most prominent investment groups, that have underperformed the market it invests in for the last three calendar years in a row and had underperformed by more than 5 per cent over the entire three-year period. 

The ‘top dog’ this year – that is, the worst performer – was named as Aberdeen Standard Investments. The money manager was revealed to have a total of four underperforming funds, as well as the largest value of underachieving assets  - valued at £1.75 billion.

Fund performance is compared to a benchmark in its sectors, giving a relative performance figure. It is important to note that negative relative performance can still see investors receiving positive overall returns. 

UK and Europe

Within the UK equities sector, Aberdeen UK Equity Income saw the worst performance with a three-year relative return of -9 per cent. Next on the dogs list was Aberdeen UK Equity, with a relative three-year return of -6 per cent.

The top performer in UK equities –labelled a ‘pedigree pick’ by Bestinvest – was Liontrust Special Situations, with a three-year relative return of 16 per cent. This was followed by LF Lindsell Train UK Equity (13 per cent), Threadneedle UK Equity Income (12 per cent), TB Evenlode Income (10 per cent) and JO Hambro UK Dynamic (6 per cent).

Liontrust UK Smaller Companies was also the best performer for UK smaller companies, with a storming three-year relative performance of 22 per cent, followed by Franklin UK Smaller Companies at 10 per cent.

The dogs in the sector were SF Webb Capital Smaller Companies Growth (-45 per cent) and Baillie Gifford British Smaller Companies (-8 per cent).

When it came to European equities, Aberdeen Standard Investments appeared again, with its Aberdeen European Smaller Companies Equity seeing three-year relative returns of -8 per cent. Old Mutual European Equity (ex UK) saw a three-year relative return of -7 per cent. 

Jupiter European and FP CRUX European Special Situations were joint top of the list for Europe, with 12 per cent three-year relative returns, followed by Artemis European Opportunities (7 per cent) and  Threadneedle European Smaller Companies (4 per cent). 

-2018 Isa fund tips: Europe’s no longer contrarian, but there’s still money to be made

US equities

The US saw some of the worst relative performance – expected in a market so heavily watched and researched. The US market is notoriously difficult for active managers to beat. Only Loomis Sayles US Equity Leaders saw positive relative three-year returns (12 per cent). Even among the top performers, negative relative performance was the norm: both JPM US Equity Income (-2 per cent) and Dodge & Cox Worldwide US Stock (-1 per cent) were labelled named pedigree picks, despite seeing negative relative returns. 

The ‘top dog’ in US equities was Janus Henderson US Growth, seeing a relative return of -17 per cent, followed by Jupiter US Small and Midcap Companies (-14 per cent), Fidelity American (-11 per cent), Legg Mason IF Martin Currie North America (-9 per cent), Allianz US Equity (per cent). 

-2018 Isa fund tips: How to find profit in the US market

Emerging markets and Japan

When it comes to emerging markets, Newton Emerging Income saw the worst returns, with a three-year relative return of -15 per cent. Next up was Legg Mason IF QS Emerging Markets Equity (-14 per cent) and Threadneedle Global Emerging Markets Equity (-10 per cent).

At the same time, even the top performers only saw relatively low returns, with Fidelity Emerging Markets seeing a three year relative return of 2 per cent and the next best performer, MI Somerset Emerging Markets Dividend Growth seeing a three-year relative return of -4 per cent.

-2018 Isa fund tips: Here’s how to profit from emerging markets

However, with emerging market growth so robust and returns so high, even poor relative performance will have bought emerging market investors healthy gains. 

In Japan, the 'top dog' was Fidelity Japan. This fund saw a three-year relative return of -11 per cent. Closely following was LF Canlife, posting three-year relative performance of -10 per cent.

Baillie Gifford Japanese, an investor favourite, saw the strongest relative returns (13 per cent), followed by LF Morant Wright Nippon Yield (10 per cent) and LF Morant Wright Japan (7 per cent). 

-2018 Isa fund tips: Japan is ready to rise again – here’s how to profit

What should investors do?

According to Jason Hollands, managing director of Bestinvest, in the past few years ‘spotting a seriously underperforming fund has become incredibly difficult.’ The bull markets in equities around the world has meant that even funds with poor relative performance have still made strong positive returns.

‘The median return across all dog funds listed in the latest report during 2017 was 10.8 per cent and only one fund actually failed to make investors any money and that was flat rather than a loss maker,’ says Hollands. ‘In rocketing Asian and Emerging Markets, you could have even experienced returns of over 20% last year in dog funds.’

The sustained bull run is ‘likely to convince many investors that the fund manager’s their money is with are doing a rather good job when in fact they have detracted from the potential returns that could have made elsewhere.’

However, the bull market will not continue indefinitely. ‘When markets enter a more challenging period, as they will do at some point,’ says Hollands ‘being invested in laggard funds that charge fees but add no value could mean staring at actual losses.’

‘Do not assume an investment fund that has risen in value is necessarily in good health,’ he cautioned. ‘Reviewing the investments you already own is particularly sensible thing to do ahead of committing any new money to ISAs or pensions before the tax year end.’

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