More than £49.6bn in assets managed by 119 UK funds have consistently underperformed, highlighting the difficulty faced by value-style fund managers during the volatile coronavirus pandemic as growth stocks continue to trade at record multiples.
The twice-yearly “Spot the Dog” list, compiled by wealth manager Tilney Bestinvest, which names and shames the worst performing investment funds, reported a 33 per cent increase in the number of “dog” funds since last year, up from 91 funds in February 2020 with £43.9bn under management.
Funds become “dogs” when they have underperformed Tilney’s benchmark indices by at least 5 per cent over the past three years. The “dog” funds represent 13 per cent of 915 funds Tilney has tracked.
“It was a phenomenal year for growth stocks, but value stocks got cheaper than ever before, said Jason Hollands managing director of Tilney Bestinvest. “While in some cases underperformance is caused by poor decision making or managers who are just pedestrian, the reason we’ve seen the numbers shoot up so much is the extreme style disparity in markets.”
“For any fund with an income bias, it’s been horrendous. They’ve really been at the coalface, being punished,” he added.
Among the 119 consistently underperforming funds, 15 hold more than £1bn in investor assets. The largest underperforming funds were the Invesco UK Equity High Income Fund with £3.21bn, which underperformed by 21 per cent, the JPMorgan US Equity Income Fund with £3.18bn (27 per cent), SPW MM International Equity with £3.17bn (11 per cent) and the St James Place Global Equity fund, which holds £2.58bn (13 per cent underperformance).
Asset manager Invesco topped the latest list of underperforming managers for the sixth year in a row, with more that £9.2bn in assets underperforming across 11 vehicles. However, Invesco’s performance has notably improved since last February’s “dog” report, when it was responsible for £13bn in underperforming assets, or one-third of total underperforming fund assets on Tilney’s list.
Jupiter was the second-worst performer, according to Tilney, after its acquisition of Merian Global Investors which held two large underperforming funds in 2020, followed by St James Place, and Schroders.
More than one-third of underperforming assets were invested in global equity income, underscoring what income managers have described as the most challenging year for investing in their professional lives.
Equity income funds have struggled due to their heavy emphasis on value-style investing, said Ryan Hughes, head of active portfolios at AJ Bell. “That style has been horribly out of favour for the past three years. Oils, banks and industrials have not been great places to find dividends.”
Because of the emphasis on dividends, value funds have not invested in high-growth stocks such as tech, which typically pay out little or nothing, but have been boosted by the pandemic. “These funds have had massive headwinds to face for the past three years. Covid has turned that into a full-on hurricane,” Hughes said.
The worst performers were the M&G North American Value Fund, falling 42 per cent below Tilney’s benchmark, GAM North American Growth, falling 40 per cent, Legg Mason IF ClearBridge Global Equity Income fund, falling 39 per cent, and the Fidelity American Special Situations fund, falling 38 per cent.
Hollands cautions that underperformance does not always mean losses, and investors should not take returns for granted. “Recognising that you might have your money invested in a dog fund is not as straightforward as you might think.”
Though 32 funds in the report lost money for investors, most did not. Investors might be paying fees to a manager who is generating return, but not outperforming the wider market, Hollands said. He added: “Stock markets in general have delivered very strong returns over the past decade and so nearly all ships have been lifted by the rising tide, even those with leaks in their hulls.”
Invesco said in response to the report that it “acknowledge[d] the disappointing performance over the past three years” for some of its funds, and of its European equities investments that “the industries that have suffered the most . . . are the sectors we would expect to lead the recovery”.
Of its UK Equity High Income fund it said: “Improvements have now been implemented to improve the clarity and effectiveness of the investment process, with the overall objective of delivering a better outcome for clients.”
St James Place said in response to the report: “Judging performance over three years can promote short-termism, fails to take into account the consistency of a fund manager and does not allow for returns to be assessed over several economic cycles, which will truly test the skill of any manager.”
Jupiter did not reply to a request for comment.