The number of underperforming ‘dog funds’ surged by 170 per cent in about six months, with Lindsell Train and Fundsmith appearing on the list for the first time.
BestInvest’s latest report into fund performance found 151 investment funds, holding £95.26bn, consistently underperformed over the past three years.
For the first time, funds from prominent British fund managers Terry Smith and Nick Train appeared on the list.
Global funds fared the worst, according to the biannual report, with the highest tally of dog funds overall - the number doubled from 24 in mid-2023 to 49 in the latest report.
Almost half of these funds focused on sustainable investing so did not benefit from a rise in oil and gas related shares.
2023 will be remembered for the rise of the ‘Magnificent Seven’ funds - Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla - which benefited from investor interest in artificial intelligence.
But over the past three calendar years, the best performing global industry sector was energy shares, as economies opened up after the pandemic.
Energy costs were also increased after Russia’s invasion of Ukraine in 2022 and the MSCI World Energy Index delivered a total return of 125 per cent between 2020 and 2023, ahead of the MSCI World Index total return of 38 per cent.
Rise in dog funds
Since the last Spot the Dog report in August 2023, funds on the list have increased 170 per cent from 56 to 151 which meet the criteria.
The value of assets held by dog funds also increased by 106 per cent to £95.26bn from £46.2bn in August.
The top three worst performing funds overall were global.
However, there was also a rise in the number of UK funds featured in the latest survey, with 34 funds holding £12bn of investors’ wealth now featured, up from just five in the previous edition.
This is equivalent to a 253 per cent increase on the £3.4bn of wealth.
Even funds managed by two of Britain’s most-prominent fund managers, Terry Smith and Nick Train - respectively the Fundsmith Equity and WS Lindsell Train UK Equity funds - made an appearance in the latest edition of Spot the Dog for the first time ever.
The report notes, however, both funds have delivered returns significantly ahead of their relevant indices over the longer term.
Fundsmith is the largest fund appearing on the list, representing £23.4bn of invested assets.
The report put this down to Smith not being exposed to the Magnificent Seven and not holding any energy companies.
This was the same for Lindsell Train UK Equity, with the fund having a skew to personal goods and financial services with no exposure to energy.
A spokesperson for Fundsmith said: “Our main UK competitor's global fund ( Lindsell Train Global Equity) underperformed ours by 16 per cent over the period chosen by BestInvest but is not rated as a 'dog' which raises an obvious shortcoming of the methodology.
"We also note that Fundsmith Equity outperformed the average return delivered by funds in the IA global sector over the last three years yet many of funds with worse performance are not rated as ‘dogs’.
"As we have always said, a year is simply the time it takes for the earth to revolve around the sun. We think that investors should judge our returns over the long term, and since inception the fund is up 596 per cent or 15.7 per cent on an annualised basis, net of fees, compared with 11.8 per cent for the benchmark MSCI World."
Importance of reviewing holdings
Jason Hollands, managing director of Evelyn Partners’ BestInvest, said the report aimed to show the importance of non-advised customers regularly monitoring their holdings.
He said: “It isn’t a simple ‘sell’ list though, because funds can endure periods for a variety of reasons, including a style bias or process that has been out-of-favour with recent market trends, but which may prove temporary.
“Other incumbents though may be serial underachievers, with little reason to continue holding them.
“The call to action if an investor owns a fund on the list is really to delve a bit deeper, evaluate why the fund has lagged and only then decide whether to stick with it or potentially move.”
He added the report could encourage more people to consult a professional.
Hollands said: "Where a client owns a fund that has had a tough run, the adviser or the wealth managers they use are best placed to understand whether it is time to make a change or reassure the client that the holding still remains suitable for their goals and time horizon.
"We think the report can be a nudge for some people who have previously self-managed their investments to consider getting professional advice or move to a managed portfolio where the job of asset allocation, fund selection and monitoring is all done for them by a professional."
tara.o'connor@ft.com
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