Investors warned over £10bn Lloyds ‘dog’ funds

Billions of pounds are stuck in sluggish funds – it’s time for a change, writes Sam Benstead

Investors should consider switching their money from £10bn of poorly performing funds run by Lloyds Banking Group, a report has warned. Nine of the bank’s funds, which were marketed under the Halifax and Scottish Widows brands, have been branded “dogs” by broker Bestinvest.

They account for a third of the £30bn of British investors’ money languishing in laggard funds shamed in Bestinvest’s half-yearly “Spot the Dog” study. DIY investors and clients of financial advisers own about £3.4bn of the Lloyds funds.

The fund shop urged investors to ditch these portfolios, which have trailed their markets in each of the past three years and by more than five percentage points over the past 36 months.

“Funds that appear on the ‘dog list’

require further investigation,” Bestinvest said. “Unless there are good reasons performance will turn around, it may make sense to switch to a better alternative.”

Lloyds’ laggard funds include the £3.9bn Halifax UK Growth fund, which lost 4pc of investors’ money over the three years to the end of June, despite the British stock market’s 3pc rise over that period. The £2.2bn Scottish Widows UK Growth fund was similarly poor, losing 3pc, while the best performing rival fund, Chelverton UK Equity Growth, delivered 74pc over the same time frame.

The banks’ income- focused funds have also performed badly. The £1.9bn Halifax UK Equity Income fund fell 5pc over three years and the £350m Scottish Widows UK Equity Income fund was down 4pc. The top rival fund over that period, Gresham House UK Multi Cap Income, rose 31pc.

The shamed funds, which now delegate stock- picking to Schroders, the fund group, were predominantly sold to investors between 2001 and 2012 by financial advisers in branches of Halifax, Bank of Scotland and Lloyds TSB.

Bestinvest’s Jason Hollands said banks such as Lloyds used their brand power and customer ties to place investors in funds that often ended up being poor value.

“Historically, many banks had their own fund management arms and because of their client bases, they didn’t really need to compete on performance or cost,” he said.

“Therefore they focused on ‘core’ strategies largely based on big, bluechip shares and didn’t tend to stray too far from the benchmark, which is of course a recipe for dull returns especially when coupled with high ‘active’ management fees. For many years such products have quietly plodded along, benefiting from investor inertia,” he said.

Last year, Lloyds committed to cutting charges on its funds by an average of 0.4 percentage points. In June, it cut the fees on the Scottish Widows UK Growth and UK Equity Income funds from 1.46pc and 1.37pc respectively to 0.87pc and 0.88pc.

That followed smaller reductions to charges on Halifax funds. In April, Halifax reduced the fees on its UK Growth and UK Equity Income funds from 1.38pc to 1.23pc and 1.24pc respectively.

Investors in the Halifax funds have been promised a further 0.4 percentage point cut, but not until the 20th anniversary of their first investment, meaning some will be waiting until 2032.

Despite those reductions, fees remain higher than the average 0.8pc paid by British fund investors, according to data from the Financial Conduct Authority, the City watchdog.

Laith Khalaf, of the broker AJ Bell, said the funds were effectively “closet trackers”, and offered similar performance to cheap passive funds, but with much higher fees.

He said investors should either move into a tracker fund, which performs largely the same job for as low a fee as 0.1pc, or buy an actual active fund that has a chance of beating the stock market.

Mr Hollands recommended Liontrust Special Situations, Evenlode Income and Threadneedle UK Equity Income as alternatives for investors seeking British stocks funds.

A spokesman for Lloyds said: “These funds are designed to bring benefits to investors over the long term, and therefore recent market performance should not be the sole basis to determine the overall performance of this style of investment. We believe the long-term outlook means their investment style is still appropriate for our customers’ investments.”

A spokesman for Schroders added: “We regularly review our investment performance in order to ensure we understand the reasons for underperformance and whether action is required to improve outcomes for our investors.”

‘Banks didn’t need to compete on performance or costs – a recipe for dull returns’