£34bn of savers’ cash is stuck in ‘dog funds’

EVEN after wading through endless fund manager websites, investor documents and bloggers’ recommendations, choosing a successful investment fund can feel like trying to find a needle in a haystack.

There are more than 3,000 UK-BASED funds open to the normal investor, each blurring into the next.

They can buy a mixture of company shares, bonds, property and other assets, and many may sound like they’re doing exactly the same thing.

But there will always be laggards and in its latest ‘Spot the Dog’ report, investment platform Bestinvest has found that a number of surprisingly big-name fund houses may be dragging behind their peers. The number of funds which Bestinvest has classed in its underperforming ‘dog’ category has rocketed since the beginning of the year, from 26 to 58.

Perhaps more worryingly, a grand total of £33.6bn worth of investors’ money is in these lacklustre funds – up from £6.4bn at the start of 2018. Stalwart fund manager invesco Perpetual bounded into the ‘top dog’ slot, with five of its funds holding a combined £15.1bn in assets falling into the underperforming category. But this is not a sign that investors need to move all their money right away.

To be put in the dog house, according to Bestinvest’s rankings, a fund must have failed to beat its relevant benchmark over three consecutive 12-month periods – and underperformed the benchmark by 5pc or more over those entire three years.

Three of the five invesco Perpetual funds which fell foul of this measure are managed by well-known stockpicker Mark Barnett ( pictured), and focus on firms making money in the UK.

invesco Perpetual’s chief investment officer nick Mustoe explains that this kind of strategy has suffered as investors have lost confidence in the UK following the Brexit referendum. But he also believes this reaction has been excessive ‘and in many cases indiscriminate’, and that there are still opportunities over the medium to long term.

overall the UK equity sector was hiding a relatively high number of dog funds, and many of those disappointing funds were labelled as income-generating.

Bestinvest points out this may be because income fund managers tend to avoid basic materials and energy companies, since they are less reliable dividend payers, but a rebound in commodities and oil prices has meant their shares have performed well recently, lifting the benchmark.

an even larger number of dog funds were collared in the global equities niche. again, many of these offenders are labelled as ‘income’, so chase companies offering reliable dividends.

But the greatest returns in global equity markets in recent years have come from ‘growth’ stocks in exciting areas like technology.

Though an out-of-favour strategy may sometimes be to blame for underperformance, there are times when the buck lies with the decision-making.

A FUND may also exhibit lacklustre performance because the manager has their eyes on a bigger prize. The fidelity Moneybuilder Growth fund, for example, holds a number of financial stocks and few energy companies – this has hampered relative performance as financials have been weak and energy stocks have boomed. But the portfolio manager is readying for ‘significant structural changes’ which he believes are under way in the global economy, and are not yet fully understood by the market. for anyone who buys into this philosophy, the Moneybuilder Growth fund could be a worthwhile punt long-term. The best an investor can do is to keep an eye on whether their fund is consistently in the dog house, weigh it against its peers and bear in mind the tables could turn on a strategy as economic conditions change.