Experienced stock picks Terry Smith and Nick Train have been included in Bestinvest’s list of underperforming funds for the first time.
Twice a year, the investment platform names and shames underperforming mutual funds, with the ‘Spot the Dog’ report revealing which funds belong in the doghouse and which have exceeded expectations.
Fundsmith Equity and WS Lindsell Train UK Equity, managed by Smith and Train respectively, appear in the list for the first time after underperforming over the past three years.
In the doghouse: Terry Smith and Nick Train’s funds feature in Bestinvest’s report for the first time
Fundsmith has been caught out by its lack of exposure to mega-cap tech stocks, known as the Magnificient Seven, and energy companies.
In 2023, the fund rose 12.4 percent in 2023, marking a return to growth after a 13.8 percent slump in 2022.
But it lagged the MSCI World Index benchmark, which rose 16.8 percent. It also underperformed in 2021 and 2022.
Smith’s “quality growth” style has also fallen out of favor as 2023 is a tough year for companies in the consumer goods sector, which makes up around a quarter of Fundsmith’s portfolio.
“Three years is still a relatively short time frame for Smith’s ‘buy and hold’ investment approach,” Bestinvest says. “However, it shows that even the strongest managers can go through tough times.”
Commenting on the report, Fundsmith said: ‘Our main UK competitor’s global fund underperformed ours by 16 per cent over the period chosen by Bestinvest, but is not rated as a ‘dog’, which is a clear flaw in the methodology at the brings light.
‘We also note that Fundsmith Equity has outperformed the average return of funds in the global IA sector over the past three years, but many funds with poorer performance are not rated as ‘dogs’.
‘As we have always said, a year is simply the time it takes for the Earth to revolve around the sun. We believe that investors should evaluate our returns over the long term. Since inception, the fund is up 596 percent or 15.7 percent year-on-year after fees, compared to 11.8 percent for the benchmark MSCI World.”
Train also suffered from a market that did not favor his style of investing in quality companies with strong brands.
Although Fundsmith and Lindsell Train have performed poorly over the past three years, over the longer term both have delivered returns that are ‘significantly higher’ than their respective benchmarks.
Other funds have also suffered from the dominance of leading technology stocks, creating a difficult environment for active managers lacking exposure.
In the six months to December 31, 2023, there will be an increase of more than 170 percent in the number of investment funds described as dogs, according to the report.
The value of assets in the dog funds also rose by 106 per cent to £95.3 billion, up from £46.2 billion in July 2023.
What is a fund called a dog?
While more and more funds have ended up in the doghouse, Bestinvest doesn’t name a fund just because there has been some volatility or because the fund has a style that may be out of fashion.
Instead, we look at funds that need to address a deeper-rooted problem. To qualify as a dog, a fund must have delivered worse returns than the market it invests in in each of the past three years.
It excludes funds that have just had a bad year, although some analysts prefer to rate funds based on their performance over five or ten years.
A fund must also have performed more than 5 percent less than the market over the three-year period.
The report only looks at funds open to retail investors, and weeds out those that are only open to institutional investors.
Bestinvest’s Spot the Dog report analyzes the performance of funds over a three-year period
What other funds have performed poorly?
The global sector had the highest number of underperforming funds, doubling from 24 to 49 in six months.
The three-year period to the end of 2023 included the reopening of economies after the pandemic, the war in Ukraine, the cost of living crisis and the impact of AI. Very few managers were able to successfully navigate all these changes.
Nearly a quarter of all dogs were global funds, of which 49 were on the list, accounting for £61 billion (30 percent) of all assets.
This included Fundsmith Equity and the St James’s Place Global Quality fund.
The UK market languished in 2023 – despite cheap valuations, sentiment remained poor.
Around 18 per cent of dog funds came from the UK All Companies sector, which has a presence in all parts of the market.
Growth funds SVM UK Growth, Premier Miton UK Growth and AXA Framlington UK Select Opportunities appeared, as well as value funds such as M&G Recovery.
Ten of the 34 funds had a ‘sustainable’ mandate, reflecting the fact that many did not have fossil fuel companies driving the markets higher in 2021-2022.
What to do with your savings if it’s in a dog fund?
Bestinvest is very clear that its report is not a list of funds to be sold automatically.
The report is based on an analysis of past performance, which is not a guide to how a fund will perform in the future.
Instead, they are funds that appear and warrant further investigation.
Bestinvest says: ‘Unless there are good reasons to believe that performance will change based on an assessment of the prospects, it may make sense to switch to an alternative fund.’
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