Terry Smith’s Fundsmith Equity escapes the doghouse, but £54bn still stuck in underperforming funds
As many as 137 equity investment funds in the UK have been condemned to the ‘doghouse’ after consistently underperforming their market benchmark over the last three years.
The report from Bestinvest, which identified the funds in the ‘doghouse’ due to persistent underperformance, found £53.4bn of investor cash stuck in funds that have consistently underperformed the market.
However, this quarter showed a a nine per cent fall on the 151 ‘horrid hounds’ recorded in March, and a 44 per cent drop on the £95.3bn in assets previously in underperforming funds.
This massive drop was partially due to the massive £24bn Fundsmith Equity fund escaping the doghouse after being condemned to it for the first time last quarter.
Other large funds that were no longer labelled as underperformers included the £7.7bn SJP International Equity fund and the £3.2bn Lindsell Train UK Equity fund.
Funds are selected for the doghouse when they fail to match their benchmark for three consecutive years and underperform by five per cent or more over the entire three-year period.
The largest fund now in the doghouse is St James’s Place’s Global Quality Fund, which has £10.7bn in assets under management and has underperformed its benchmark by 27 per cent over the last three years.
Overall, 10 Great-Dane-sized funds (each over £1bn in size) account for £26.8bn of the assets on the list, or about half of all investor cash in the funds.
Sustainable funds make up a fifth of all funds on the list of poorly performing funds, thanks to the unexpected surge in oil and gas prices on the back post-pandemic supply chain pressures in 2021.
Over the three-year period covered in the report, the MSCI World Energy Index delivered a total return of 98 per cent, well ahead of the MSCI World Index return of 28 per cent and the MSCI Global Alternative Energy Index decline of 38 per cent.
Global equity funds also made up a significant proportion of the underperforming list, with 44 being ‘sent to the kennels’, though this was less than the 51 at the start of the year.
“When you consider the Magnificent seven now represents a third of the US S&P 500 Index by market capitalisation and 22 per cent of the MSCI World Index, it helps to explain why global fund managers not fully weighted to this extremely concentrated band of influential stocks struggled to consistently beat the markets,” said Jason Hollands, managing director of Bestinvest.
The tally of underperforming UK equity funds came in at 44, a similar level to last quarter but a dramatic rise from the 12 listed last year.
“Funds can stumble for a myriad of different reasons – from poor decision making or a run of bad luck to instability in the team or because the fund has a style or process no longer favoured by recent market trends,” added Hollands.
“Identifying whether a fund is struggling with short-term challenges that will later pass, or more deep-rooted issues with long-term consequences is vital for investors considering whether to remove an investment from their portfolio.”
Worst performing funds
Fund | Value of £100 after three years | Three-year underperformance to benchmark (per cent) | |
1 | Artemis Positive Future Fund | £62 | – 71 |
2 | Baillie Gifford Global Discovery Fund | £40 | – 65 |
3 | FTF Martin Currie Japan Equity | £53 | – 64 |
4 | AXA ACT People & Planet Equity Fund | £80 | – 53 |
5 | Aegon Sustainable Equity | £82 | – 52 |
6 | IFSL Marlborough Global Innovation Fund | £82 | – 51 |
7 | L&G Future World Sust UK Eq Foc | £74 | – 51 |
8 | Baillie Gifford Japanese Smaller Coms Fd | £56 | – 47 |
9 | FSSA Japan Focus Fund | £70 | – 47 |
10 | Baillie Gifford European | £74 | – 46 |