Savers' billions swallowed by underperforming 'dog' funds

SAVERS have billions lying in underperforming funds run by some of Scotland's biggest investment companies, according to research published this week.

More than 13.2 billion is invested in dozens of failing UK funds despite the recent stock market resurgence, the latest Spot the Dog report by broker Bestinvest reveals. It singled out funds that had underperformed a relevant sector benchmark by at least 10 per cent cumulatively over three years and underperformed the same benchmark in each of those years. It identified 90 unit trusts consistently falling short of their targets, up from 77 a year ago.

The list features some of the UK's most popular funds and biggest providers, with Edinburgh-based groups Scottish Widows, Swip and Standard Life among them. The amount of money invested in the worst performing funds has dropped by 7.2 per cent since the previous report in April, but Bestinvest warned that too many investors continue to allow fund management firms to get away with letting them down.

More than 4.5bn of investors' money is languishing in underperforming UK equity income funds alone, with 13 of the 74 funds in the sector falling short of their benchmarks over the last three years.

Adrian Lowcock, senior investment adviser at Bestinvest, said the report underlined that "rank underperformance" remained too prevalent in the funds industry.

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"With the age of austerity cutting ever deeper into our personal finances and threatening to reduce personal wealth in the next few years it has never been more important to make sure we get the best from our savings and investments," said Lowcock.

"Investors simply cannot afford to leave their hard-earned money languishing in dog funds and hopefully our report serves as a wake-up call for people to review their portfolios and ensure their money is working harder for them."

Scottish Widows and its investment arm Swip were the biggest culprits with 11 so-called dog funds worth 2.144 billion, according to Bestinvest, which said 42 per cent of the group's assets under management were in the dog house.

The emerging markets funds run by both Scottish Widows and Swip are in the kennel in the global emerging markets sector. However Edinburgh rival Martin Currie, which poached the Swip emerging markets team earlier this year, is the biggest underperformer in the sector for the second report in a row.

"The departure of fund managers in the emerging markets team may be a blessing in disguise," the report said of Scottish Widows/Swip. "However, the issue of poor performance crosses sectors - Japan, UK, Europe and not just emerging markets.Something needs to be done to address performance."

Swip and Scottish Widows also feature among the five dogs in the UK smaller companies category, where the Standard Life smaller companies fund run by Harry Nimmo has produced the best performance over the three years covered in the study.

Martin Currie has seven funds worth a total 374m in the kennel, with the emerging markets vehicle joined by its UK equity income, Asia Pacific and Global Alpha funds, among others.

Crisis firm Gartmore contributes five funds worth 941 million. The group was effectively put up for sale this week after being rocked by the news that star fund manager Roger Guy, who runs the 3.5 billion European Large Cap team, unveiled plans to retire early next year. Guy's announcement coincided with the news that chief investment officer Dominic Rossi is leaving to join fund management rival Fidelity and followed the controversy earlier this year over Guillaume Rambourg, who was suspended and later quit over an in-house investigation into claims that he breached company rules.

"Whilst poor performance could be explained away by some, because of the distractions management has had this year, we look at performance over three years. With nearly a quarter of assets under management in the dog house, Gartmore has its work cut out in 2011," Bestinvest.

Another influential broker, Chelsea Financial Services, last month published its own version of the dog funds research in the form of its latest Relegation Zone report.

Its research, which singled out funds that have been third or fourth quartile for three consecutive years, produced similar results to that conducted by Bestinvest, featuring 85 funds with 13.2 billion in funds under management.

Swip and its parent company, Scottish Widows, were again prominent, supplying seven funds to the relegation zone. The 1.1bn Swip multi-manager UK equity income fund was the biggest fund to feature, while the 710m Scottish Widows UK equity income fund also appeared.

Standard Life Investments had three underperforming funds in the zone, in the form of the 864.4m global index-linked bond, the 602.8m global equity and the 490.2m corporate bond funds. The report pointed out that Standard Life was just one of several big names with several funds consistently underperforming.

It said: "Investment houses should not be able to depend on investor inertia to allow these funds to continue to take in assets while continuing to underperform."

The presence of "perennial underperformers" Scottish Widows and Swip was less surprising, it added. "Once again it goes to show; poor performance can affect the big names as well as the small."