The number of ‘dog funds’ that underperform is increasing enormously

Over the past six months, the number of mutual funds described by analysts as “severe and persistent underperformers” has risen more than 27 percent, research shows.

BestInvest’s latest ‘Spot the Dog’ report shows a total of £46.2 billion in savings withering in so-called ‘dog’ funds, an increase of a whopping 142 per cent since the total of £19.1 billion in February.

There are thousands of funds on offer to UK investors across a range of asset classes, sectors and regions, making it difficult for the average DIY fund buyer to find the best place to park their money.

But twice a year, Bestinvest names and shames underperforming mutual funds, with the investment platform’s “Spot the Dog” report revealing which funds belong in the doghouse and which have exceeded expectations.

What Big Name Funds Are in the Doghouse?

The report finds that 56 equity funds have been identified as “severely and persistently underperforming,” a 27 percent increase from the 44 funds identified in the February report.

The investment giant with the most vehicles on the list is St. James’s Place with six funds on the list, twice as many as any other individual fund group.

It currently has £29.3 billion in these funds, 63 per cent of the total canine fund assets in the survey. The second worst player, Artemis, has only 5.8 percent.

There are three SJP global sector funds – Global Quality, Global Growth and International Equity – as well as two European and one emerging markets fund.

Artemis has three dog funds, namely the two US funds – North America and North American smaller companies – largely because they were underweight in Apple, Nvidia and Tesla, and exposed to the now-defunct First Republic Bank.

The Global Select fund is also on the list.

Other notable entries include Columbia Threadneedle, which has four funds on this year’s list, with combined assets of £1.9 billion, and abrdn, which has two funds on the list, up from three in the previous report.

BNY Mellon and M&G completely avoided the list, while Baillie Gifford had only one fund on the list.

What is a fund called a dog?

Global stock markets have had a better year than last year, but the biggest gains have come from megacaps – or the world’s largest companies – that have benefited from interest in artificial intelligence.

While more international funds have entered the doghouse, Bestinvest doesn’t name a fund just because there has been some market volatility.

Instead, it looks to funds that have a deeper rooted problem to address, rather than just a momentary faltering. To qualify as a dog, a fund must have underperformed the market in each of the past three years.

This excludes those who just had a bad year, but it’s worth noting that many experts prefer to rate funds based on their five or even ten year performance.

Second, a fund must lag the market’s returns by more than 5 percent over the three-year period under consideration.

It only looks at funds that have share classes that are open to retail investors, and only open to institutional investors.

Which funds have performed particularly poorly?

Global funds are in the kennel of shame, with 24 funds on the list, up from 11 funds last time. It represents 15 per cent of total assets in the sector, up from 3 per cent last time, equivalent to £32.14 billion.

Global funds have had a rocky ride as benchmarks have been dominated by the US and technology. Bestinvest suggests that many managers have been misled by the sell-off of 2022 and then again in 2023, with big tech names and the US market coming out on top again.

St James’s Place funds make up £26.05bn of this, with its £11.47bn Global Quality fund, £7.09bn Global Equity and £7.49bn Global Growth funds making the list.

Other big names include Columbia Threadneedle’s Responsible Global Equity fund, one of the responsible/sustainable funds on the list.

Also embarrassed are FP WHEB Sustainability Fund, Jupiter Global Sustainable Euqities Fund and the Sarasin Responsible Global Equity fund.

While last year’s fossil fuel exclusion may have had a negative impact on performance, Bestinvest says it shouldn’t have made the difference between a good fund and a bad one.

There were five UK All Companies funds, just 3 per cent of the total market, but it still accounts for £3.4 billion in assets.

Scottish Widows UK Growth is a ‘repeat offender’, says Bestinvest, showing ‘no sign of better behaviour’. Other funds include the Unicorn Outstanding British Companies fund, which struggled with its higher weighting in small and medium-sized companies, Trojan Income and AXA Framlington UK Sustainable Equity.

The Invesco UK Equity High Income is now out of the doghouse and has ‘responded to the discipline imposed by new managers Ciaran Mallon and James Goldstone’.

Which funds are a better breed?

Some sectors are behaving better than others, with the smaller companies in Japan and emerging markets having just one or two dog funds to their name.

After lagging behind its international peers, Japan has experienced a certain upswing this year. A slump in the yen has boosted the competitiveness of Japanese exports and the value of foreign earnings for Japanese companies.

Japan’s £183 million T Rowe Price fund, which was listed, represents 1 per cent of total assets in the sector. Bestinvest says its growth approach is not to the liking.

There were also no global equity income funds on the list this year due to the resurgence in dividend investing.

What to do with your savings if it’s in a dog fund

While the report highlights some of the worst-performing funds, it is not a list of funds that should be automatically sold, as past performance is not necessarily indicative of how well the fund will perform in the future.

Jason Hollands, CEO of Bestinvest: ‘Of course every fund manager will go through periods of weakness – whether it’s bad luck or sticking to a style or process that is temporarily out of fashion.

It is essential to determine whether these are short-term or structural factors and investors should ask themselves a number of questions before deciding whether to stay with or switch a fund.

Things to consider include whether a fund has grown too large, which could limit its agility, or whether there have been subtle but important changes in the management team.

“Moreover, is the manager straying from a previously successful approach or are they now overburdened with additional responsibilities?”