Are your savings in one of these ‘dog funds’, which could lead to a worse pension?

Are your savings in the doldrums? Research from asset manager and DIY investment group Bestinvest has found that a staggering £53bn of UK investors’ money is tied up in funds that have underperformed the benchmarks they’re trying to beat for three years in a row.

These 137 so-called ‘dog funds’ are actively managed, meaning they charge fees for managers who manually select investments. But in reality, investors would have been better off not paying for managers’ salaries and instead buying a cheap tracker fund with investments selected by algorithms.

According to Jason Hollands of Bestinvest, those who find their investments on the list of dog funds should ask themselves whether they want to stay where they are – or go somewhere else.

“For anyone choosing to invest in actively managed funds, it is essential to find managers who have the right skills to deliver superior returns over the long term. Only then can they justify the costs of investing in those funds,” he says.

Since many fund managers fail to do this in the long term, the report serves as a guide to encourage investors to monitor the performance of their investments more closely so that they can assess what, if any, action is needed and when.’

Embarrassed Great Danes and Disappointing Cockapoos

The good news from the latest edition of the Spot the Dog report, which has been running for over 30 years, is that the amount of money held in dog trusts has fallen by 44 percent over the past year.

However, this is largely because several giant funds, including Terry Smith’s Fundsmith and Nick Train’s WS Lindsell Train UK Equity, which featured in the previous list, narrowly escaped inclusion this time around. Ten ‘Great Dane’-sized funds, each with more than £1bn of investor money, still remain on the list of infamy.

St James’s Place Global Quality Fund is the largest fund on the list, with £10.69 billion in assets under management.

Thanks to this fund, £100 of investor money has turned into just £106 in three years, while the same £100 invested in the global benchmark would be worth £133 today.

Justin Onuekwusi, Chief Investment Officer at St James’s Place, said: ‘The performance of our funds includes our only ongoing fee, which covers the costs of the external fund manager, administration and advice.

‘Most of the funds we are compared to in this analysis do not include advisory and administration fees, so it is not a like-for-like comparison. The ‘unbundling’ of our costs in 2025 will simplify comparisons with our peers.’

The worst-performing fund, Artemis’ Positive Future Fund, offered investors who bought into it three years ago anything but a positive future. In fact, investors lost money.

The relatively small fund, which has just £6.5 million in assets under management, underperformed the index by 71 percentage points. Every £100 invested in the fund three years ago would be worth just £62 today, while that same £100 would be worth £133 today if invested in the global index.

An Artemis spokesperson said the fund had experienced a “perfect storm” as it invests in small and medium-sized companies that have struggled in recent years and was launched during the Covid crisis in April 2021.

“The impact of Covid, rising energy prices and then explosive inflation and interest rates had a particularly strong impact on these types of companies, which were hit much harder by the market sell-off,” the spokesperson said.

He adds that the fund now has a new manager and a new team.

Green Complaints and Global Devaluation

The list is dominated by two types of funds: those that invest in global companies and those with a ‘green’ or sustainability focus. Around a quarter are so-called sustainable funds, meaning they may not invest in certain sectors of the stock market or actively invest in areas they believe will drive positive change.

However, the Bestinvest report points out that this bias means they may have missed a surge in companies owning oil and gas stocks, particularly in the UK. A whopping 44 global companies are on the list.

This may seem strange, given the rally in global equities, particularly in the US. However, Bestinvest experts say that growth in global companies has been very concentrated.

Funds that invested in certain stocks performed exceptionally well. Funds that did not have significant losses.

The so-called Magnificent Seven companies (Apple, Nvidia, Tesla, Google-owner Alphabet, Meta, Microsoft and Amazon) accounted for a fifth of the value of global stock markets by the middle of this year, thanks to their meteoric growth.

“Fund managers who are not fully aware of this handful of companies will struggle to keep up,” the report said.

Don’t rely on advisors to make the right decisions

If money is on the list it should be a warning sign, especially if you are paying for advice, says Bedford-based financial adviser Ian Dempsey.

“If you hire an advisor who doesn’t make changes, doesn’t reallocate or doesn’t rotate funds that are consistently on this list, then it’s simple: you need a new advisor,” he says.

‘I see far too many clients who have had little to no change for years and therefore perform poorly or charge high fees. There is little explanation as to why they are on track and whether they are on track to achieve their goals.’

Bestinvest’s Jason Hollands says the list shouldn’t be treated as “a simple list of funds to sell”. “Identifying whether a fund is struggling with short-term challenges that will resolve later, or with deeper issues, is vital for investors considering removing an investment from their portfolio,” he says.

When selling funds, always check that you have not inadvertently shifted the balance of your entire portfolio towards one sector, region or overall risk level.

Look at your investments as a whole and see if they can still help you achieve your long-term goals.

View the full list of free ‘dog funds’ at www.bestinvest.co.uk/investment-insights/spot-the-dog