Beware of the ‘dog’ funds eating your wealth

THE last year has been rough on every investor, as global stock markets plunged but some suffered an absolute howler and the bad news is that you might be one of them.

If you have investment funds in a stocks and shares Isa or personal pension plan, you have to accept that some underperform from time to time.

However, the worst of breed underperform year after year and cost you a small fortune over time. As if that was not bad enough, many combine poor performance with high charges, which means you get bitten at both ends.

So how do you find out if the fund managers in your portfolio are barking up the wrong tree? By checking out the latest Spot the Dog report, available from online investment platform BestInvest.co.uk.

It has just published its latest edition showing that investors have a massive £54.6 billion tied up in serially poor performing funds which it brands “dogs”. The number has rocketed in the last year and they could be sinking their teeth into your long-term retirement wealth.

DOWN, BOY

Britain may be a nation of dog lovers but you have to draw the line somewhere. A good place to start is your Isa and pension.

Bestinvest says a record amount of money is now tied up in dog funds, and the only people to benefit are the managers offering these mutts.

Underperforming managers were paid an incredible £537 million in fees over the last year, which is a handsome reward for failure.

Reputation is no guarantee as there are some big-name managers in the kennel, including the UK’s highest-profile manager Neil Woodford, whose eponymous fund Woodford Equity Income is in the doghouse for the first time.

The list also includes prestigious City names, with funds from Invesco, Artemis, Threadneedle, Janus Henderson, St James’s Place, Hargreaves

Lansdown, M&G, Jupiter and Aviva.

HOUND DOGS

Bestinvest managing director Jason Hollands, said the number of dog funds has increased fourfold in the last year from 26 to 111. Of these, 14 have more than £1 billion of assets under management, showing that size is no barrier to underperformance.

The largest is Invesco High Income, widely held by private investors with a £7.85 billion under management, followed by the £5 billion Woodford Equity Income.

Artemis Global Income is the third biggest dog with almost £4 billion under management.

Invesco Income, Threadneedle UK, Janus Henderson European Selected Opportunities, St James’s Place UK High Income, HL Multi-Manager Income & Growth, M&G Dividend and St James’s Place Global Equity Income complete the top 10 hounds.

Their sheer size means that many ordinary investors, possibly including you, have plenty to howl about.

PAW PATROL

Even the best managers can have the odd bad year, but Spot the Dog only names funds that have failed to beat the markets they invest in for three years on the trot and by more than five per cent over the period. This sniffs out consistent poor performers rather than those suffering a short-term blip.

The report examines investment funds such as unit trusts and openended investment companies, across a wide range of stock markets from the UK to Japan.

Fund managers like to conceal their failures but the report names and shames those that are charging fat fees for thin returns.

DOG-EARED

Hollands says the difference between the best and worst performing funds is huge, and poor stock picking is largely to blame, with funds targeting the UK market faring worse recently.

Many struggling global income funds have been hit by lack of exposure to the booming US. Hollands said underperforming funds have been able to hide in a 10-year bull run but recent volatility has exposed widespread underperformance: “Keep a beady eye on your investments to see if they are adding value for the fees you are paying.”

Switching funds via an online platform such as Bestinvest, Hargreaves Lansdown, Interactive Investor and others is quick and easy, with minimal charges.

‘Keep a beady eye on your investments to see if they are adding value for the fees you are paying’

WOOF, WOOF

Research shows that three quarters of active fund managers fail to beat the stock market after their charges have been deducted, and many investors are switching to passive index tracking funds that aim to replicate market performance with much lower fees.

Exchange traded funds (ETFs), offered by the likes of BlackRock and Vanguard, typically have no upfront charges and fees as low as 0.07 per cent, against 1 per cent or more on many active funds.

James Norton, senior investment planner at Vanguard, said with an index-tracking ETF there is little danger of underperforming the market: “As ETF fees are so low, they do not eat away at your returns, which improves your chance of success.”

Alternatively, you could follow the latest star managers, such as Terry Smith who runs the US-focused Fundsmith Equity, or investment team Michael Lindsell and Nick Train, who manage Lindsell Train Global Equity and LF Lindsell Train UK Equity.

However, as this year’s Spot the

Dog report shows, even the brightest stars can give investors claws for complaint.