Where not to invest? These underachievers are to be sold or avoided.
Investors continue to hand millions of pounds a year in charges to managers of funds that have woefully fallen behind the wider market.
Fear and inertia lead investors to plug millions of pounds into funds that are so far behind their peers there seems little hope of recovery.
Exclusively for The Telegraph , Chelsea Financial Services has named and shamed 10 funds it thinks investors should drop from their portfolio based on how badly these funds have done in comparison to the average fund in their sector.
These funds have underperformed the sector average by the largest amount over the three years up to December 31 and should be sold, according to Chelsea.
The good news is that investors are becoming wise to these duds. The amount languishing in these funds has fallen to £376m from around £650m a year before.
Darius McDermott of Chelsea said: "UBS Smaller Companies was the worst underperformer over the last three years, returning 44.1pc less than the sector average. It is extremely worrying that funds can underperform their peers to this extent. The only consolation this time is that investors in these funds don't seem to need a referendum as to whether to stay in or get out. They are voting with their feet."
We asked financial advisers what to do if you own the funds most trailing their peers, revealed below.
= UBS UK Smaller Companies =
Underperformed average fund by 44.1pc
Run by Frank Manduca, this fund has posted positive results over the past three years, returning 15.4pc for investors. But the rest of the sector has stormed ahead, with the average smaller companies fund returning nearly 60pc to investors.
"The UBS UK Smaller Companies fund has been a persistent underperformer, undershooting every year for five years, and is heavily weighted towards AIM traded companies," said Jason Hollands of BestInvest.
"AIM has been out of favour since the credit crisis began. Investors could do much better elsewhere, but in reality there aren't many left in the fund, which has dwindled in size to just £13m. That's tiny for an operation like UBS (Xetra: UB0BL6 - news) ."
= Close Special Situations =
Underperformed average fund by 43.9pc
This fund has a great longer-term record, but short term it has disappointed. The fund remains small and, even with recent market uplifts, has not roared ahead.
Wealth manager Philippa Gee said investors should sell as there are many better players in the sector.
= IM HEXAM Global Emerging Markets =
Underperformed average fund by 33pc
Since the disbanding of the original management team, this fund's fortunes fell. BestInvest said that there were better resourced emerging markets teams with more impressive track records elsewhere tipping First State Global Emerging Market Leaders as an alternative.
= Allianz Global Eco Trends =
Underperformed average fund by 31.6pc
Ms Gee said investors should hold on to this fund for now.
"This is a fund that will be of interest depending on your outlook. Eco energy, pollution and clean water are the key themes, and it comes down to whether you are prepared to play what could be a very long-term game," she said.
= PFS Downing Active Management =
Underperformed average fund by 26.9pc
This fund invests in small and micro-sized companies. The current management team took on the mandate from another manager, and are in the process of turning the portfolio around. However, due to liquidity constraints, this has taken longer than expected.
Mr McDermott said the performance has improved under their tenure and may be worth holding onto.
= Invesco Perp Japanese Smaller Companies =
Underperformed average fund by 26.8pc
The falling yen and poor calls on technology stocks have meant this fund has faltered.
"This performance is disappointing given small cap stocks have been a relative bright spot in Japan in recent years and the fund is managed with boots on the ground in Tokyo. The approach on this fund is at the higher-risk end of the spectrum as it focuses on under-researched companies," said Mr Hollands.
= Barmac The Castleton Growth =
Underperformed average fund by 26.4pc
Barmac is a Leeds-based private client manager and this small in-house fund of funds is managed with a conservative brief. It actually did well last year against its benchmark, but had a terrible 2011, so the three-year numbers look disappointing.
= PFS Prodigy Asia Emerging Markets =
Underperformed average fund by 24.74pc
"This is a fairly new fund, with a three-year record that has been a tale of two halves. It actually delivered very strong performance in its first year and then had a dreadful second year. For the past year it has been broadly in line with the index. So, while its three-year ranking versus peers is poor, the jury is out. The manager, David Robinson, is ex-Barings and also managed an Asia long/short hedge fund at Sofaer Capital," said Mr Hollands.
= F & C High Income =
Underperformed average fund by 23.9pc
"This fund is restricted in its asset allocation at a minimum of 60pc in bonds. The rest of the sector is generally much more flexible in its allocation between equities and bonds and generally has a higher equity weight than 40pc," said Mr McDermott. "So as a rule of thumb, when equities perform strongly the fund will underperform and when they perform poorly the fund will outperform the sector."
= Aviva Inv Property Investment =
Underperformed average fund by 23.8pc
This fund has more exposure towards more risky, higher-yielding property rather than prime, lower-yielding property. Secondary assets have significantly underperformed prime assets since the market started to recover from the 2007-2009 collapse. Aviva (LSE: AV.L - news) expects this to be the case for about another year, when they hope the gap will close.
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