More than 160 funds have been plunged into Chelsea Financial Services' 'Redzone' after providing consistently disappointing returns.
Chelsea analysed the performance of all funds in the Investment Association universe and found 162 were in the 'Redzone' — meaning they underperformed their sector for three consecutive years, with no manager or process change to curb the trajectory in the last 18 months.
Most culprits were in the IA Global sector — 50 funds and £16.5bn of assets ‘redzoned’ by this year’s analysis were from this group.
This was because a stellar 2020 for certain US equities saw the sector’s average performance soar, meaning the many funds in the sector not positioned towards the primarily tech-based ‘Covid winners’ struggled enormously to keep up.
The strong US performance also meant the second worst group was North America, as 26 funds and £9.4bn of assets failed to keep up with the high-performing sector and landed in the Redzone.
Europe excluding the UK and the UK All Companies sector were joint third with 11 funds apiece as value stocks - which dominate the UK market - struggled amid the backdrop of the pandemic.
Value stocks, with low price tags, typically perform well in market downturns but the coronavirus crisis has seen quality growth stocks, such as US tech companies, outperform.
The troubled ten
Chelsea Financial Services “Dropzone” — the 10 funds from the RedZone that have underperformed their sector average by the biggest margin over three years — was dominated by global energy funds.
Oil funds have struggled enormously over the past year after a price war between Russia and Saudi Arabia coincided with the global shut down caused by the coronavirus crisis.
At one point, the price of oil turned negative over fears of storage and a lack of demanded.
Guinness Asset Management’s Jonathan Waghorn said Covid had represented the “largest external shock” to world oil demand in many, many years and that no conventional energy companies were immune.
| The 'Dropzone' | |
| Fund | Underperformance from sector average (%) |
| Schroder ISF Global Energy | 81.57 |
| Guinness Global Energy | 77.39 |
| Denker Global Financial | 43.41 |
| Ninety One Global Special Situations | 38.95 |
| Pictet Digital | 36.76 |
| NFU Mutual Global Growth | 34.99 |
| M&G North American Value | 34.48 |
| MFS Meridian US Value | 33.87 |
| BNY Mellon US Equity Income Fund | 33.28 |
| Robeco BP US Large Cap Equities | 33.21 |
Darius McDermott, managing director of Chelsea Financial Services, said: “With many economies looking to ‘build back better’ with cleaner energy, it’s unlikely the sector will rebound strongly.
Equity income funds, typically skewed towards value stocks, and value funds also themselves also in the list after facing strong headwinds the past few years.
A spokesperson for M&G said: “Value investing has been out of favour for a number of years as investors have instead sought growth, quality and momentum companies, but there are signs that this is in the process of reversing.”
An NFU Mutual spokesperson said its Global Growth fund had moved to a different strategy in the second half of 2020 so it expected to improve performance over the long-term.
Fallen fund houses
The fund houses with the most funds in the Redzone were Schroders and Aberdeen Standard Investments, each with six funds struggling to keep up with their sector’s average.
Despite this, McDermott described Aberdeen’s movements as a “turnaround”.
He said: “ASI has, thankfully, continued its turnaround. The group is joint ‘top’ with Schroders, but assets under management in the Redzone are now down to less than £2bn.”
Iain Pyle, manager of the ASI UK High Income fund, said: “The fund targets a higher yield than the average equity income fund [...] so it naturally had exposure to some higher yielding, but higher risk, parts of the market in the early part of 2020.”
Meanwhile Thomas Moore, the manager of the ASI UK Income Unconstrained fund, said macro-dominated markets had created challenges for the portfolio’s bottom-up, non-consensus approach.
A Schroders spokesperson said: “We recognise that there will be periods of underperformance given where we are in the market cycle and the significant impact of the global pandemic.
"We remain confident that our strategies will perform for our investors over the long term."
JP Morgan, Invesco and UBS made up the five worst in terms of number of funds in the zone, with five funds each making the list.
But the worst offender in terms of assets was in fact Franklin Templeton — its giant Emerging Markets Bond and Global Bond funds, with some £9bn of assets between them, were both placed in the Redzone.
McDermott said there was good news regarding the general direction of travel for investors as more pressure piled on asset managers regarding value for money.
He said: “With value for money statements now mandatory for all fund management companies, the further good news is that consistently underperforming funds were now likely to be addressed in a timelier manner.
“We’ve already started to see some companies consolidate their ranges and look to provide a better investor outcome.”
All asset managers mentioned were approached for comment.
imogen.tew@ft.com
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