finance

Scottish investment firms 'in the dog house' over underperformance


A new report has found that funds managed by Scottish Widows, Aberdeen Standard Investment (ASI) and Standard Life all consistently underperformed their stock market peers during the last six months.

Bestinvest’s Spot the Dog research showed that 119 stock market investment funds faired poorly – among them 15 major companies with more than £1bn of investors’ cash each.

The number of funds named as ‘consistently underperforming’ in the biannual report was up by a third, meaning investors are getting lower returns than they could find elsewhere.

The funds identified collectively hold around £49.6bn in customers’ savings.

They all delivered a worse return than the markets they invested in during 2020, 2019 and 2018 – and also underperformed by at least 5% across the three-year period.

ASI had eight funds across the nine categories that were underperforming. One of which, that is still underperforming, was previously managed by Neil Woodford.

ASI’s LF focus fund fell to a -35% return over the past three years, while its UK income unconstrained equity fund followed at -17% and the high income equity was down -11%.

Only one of its funds was chosen as a ‘pedigree pick’ – ASI’s UK ethical equity fund.

Woodford explainer

Woodford was a prominent investor, known for creating a lot of wealth during his time at Invesco, with his fund holding £15bn of investor’s cash at its height.

He left the firm in 2014 to set up Woodford Investment Management, with its equity income fund gaining many retail and institutional investors. Recent underperformance brought scrutiny over its holdings and in June 2019 it was suspended after becoming overwhelmed by withdrawal requests.

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Earlier this month, Woodford set out plans for a comeback – based in Jersey – only to have the Financial Conduct Authority cast doubt on them with a statement noting its ongoing investigation into the former firm’s collapse.



Fund manager Neil Woodford has fallen from grace

Thomas Moore, who manages the ASI UK income unconstrained that Woodford was previously responsible for, said he remains “highly confident” in the funds’ ability to generate outperformance for clients.

“Of note, consistent application of the investment process and the emergence of a more constructive backdrop for fundamental stock picking have delivered strong outperformance versus sector peers over the last six months.

“In our view many of the portfolio holdings in the unconstrained portfolios are materially mis-priced with valuations that do not reflect their robust fundamentals – we see the conditions for this performance profile to repeat in 2021, underpinning our bullish outlook on the prospects for our unconstrained strategies.”

Iain Pyle, fund manager of the ASI UK high income, added: “The fund targets a higher yield than the average equity income fund, looking to deliver a 10% yield premium to the benchmark through cycle – in doing so it naturally had exposure to some higher yielding, but higher risk, parts of the market in early 2020.

“At the same time, the yield target meant the fund was underweight in low yielding areas of the market – such as software and consumer staples which were relatively immune to the impact of the pandemic – this led to some underperformance, but importantly the fund continued to deliver a premium level of income, its primary goal.”

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The benchmark criteria is the fund must have underperformed by 5% or more over the entire three-year period of analysis. Companies that have seen consistent growth within this time are classified as ‘pedigree stocks’.

The funds mentioned in the Spot the Dog report all delivered a worse return than the markets they invested in during 2020, 2019 and 2018. They also underperformed by at least 5% across the three-year period.

Standard Life fared slightly better, with only one of its many funds being mentioned in the dog list.

Its UK equity general trust saw a return of -5% during the past three years, meaning the average three year return on £100 was £89.

The report also showed that the European growth trust for Scottish Widows, managed by Schroders, was one of the big money investments to have underperformed.

The report found that £3.3bn of customer’s cash was invested into this fund, with a -5% return.

Three of the Schroder funds used systematic data driven investment processes, which tend to invest in undervalued companies that could return seeing a high yield

These types of funds have struggled in an environment where ‘growth’ stocks in areas like technology and communications services have significantly outperformed, leaving funds targeting undervalued companies or dividend generating businesses behind.

Scottish Widows have been contacted for comment.

Bestinvest’s Spot the Dog report showed that Invesco retained the bottom spot, ranked as Bestinvest’s Top Dog for the sixth time in a row. It was followed by Jupiter, St James’s Place and Schroders.

“If your savings are tied up in an investment fund that is repeatedly delivering worse returns than the market it invests in, then you really owe it to yourself to take a closer look and think about whether you might be better off moving it elsewhere,” said Bestinvest managing director Jason Hollands.

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“The differences between the best and worst performing funds are enormous, so it is essential to choose funds very carefully and then keep a beady eye on them or opt for low-cost trackers instead – the latter won’t beat the returns of the market, but will closely mimic them.”

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