Bestinvest’s table of underperformers is back

Investors have £19.5 billion languishing in almost 50 unit trusts that consistently fall short of their benchmark, according to the latest Spot the Dog research by broker Bestinvest.

And while buoyant stock markets have reduced the number of dog funds from 53 to 49 over the past six months, those that remain include funds that are hugely popular with pension savers and investors.

Among them is the £1.2bn Standard Life Smaller Companies fund, managed by the highly-regarded Harry Nimmo, and the £6.7bn M&G Recovery fund.

The research – which analyses unit trusts and open-ended investment companies but not investment trusts – picked out those that have underperformed in each of the last three years and by more than 10 per cent over the three years as a whole.

This time around, the report is dominated by the global sector, which contributes 20 funds to the doghouse. North American funds also fare badly, with a high proportion of US-focused funds continuing to underperform.

In contrast, not one UK equity income fund is featured, reflecting the recent strong performance of UK stock markets.

More than half of the assets in the latest list are accounted for by Prudential-owned fund management giant M&G. Investors have more than £10bn in the firm’s three dog funds, the M&G Recovery, M&G Global Basics and the M&G American.

But it’s the inclusion of the Standard Life Smaller Companies in Bestinvest’s report that may be the biggest surprise, said Jason Hollands, managing director at Bestinvest.

“It’s a pretty big beast for a small-cap fund, alongside which Harry Nimmo also manages an investment trust and a global small-cap fund (which has also had a disappointing run),” he said.

The fund was “soft closed” three years ago amid concerns that it was getting too big, yet earlier this year it was made available again on certain platforms.

“While we believe the main issues have been around investment style being out of favour with prevailing markets, the size of assets being managed by the team probably doesn’t help either,” said Hollands.

And that serves as a timely reminder to investors of the pitfalls of placing their faith in the biggest funds, according to William Hunter, director of Hunter Wealth Management in Edinburgh. “A risk in investing in large funds is that they require large stock holdings and there are only so many companies with this stock liquidity without paying over the odds for the stock,” he explained.

The biggest funds are often the most aggressively marketed, particularly towards DIY investors who buy and sell their investments through so-called direct-to-consumer (D2C) platforms such as Hargreaves Lansdown and Fundsnetwork.

”DIY investors can often buy big names and fall for the marketing hype,” claimed Hunter. “I have seen people do this on countless occasions, only to suffer financially by paying over the odds in charges and staying in funds that have been ‘off the boil’ for too long.”

While it can be difficult for investors to ignore the perceived quality of the big fund houses, he added, most firms have a dud fund or two.

“The only way to avoid them is to constantly review the portfolio and make strong decisions as to when to sell,” he said.

Hollands agreed, warning that too many people lose out because they fail to keep an eye on their investments.

“It is a problem that is exacerbated when markets have risen strongly, as they have in recent years, as it is easy to assume that because the value of your investment has increased, that all is going well and the manager is doing a good job,” he said.