£537m in fees... for the failing fund managers
ADAMNING report exposing the inability of some fund managers to deliver value f or money f or investors has been published by Bestinvest, part of wealth manager Tilney. The research is based on close scrutiny of the performance of nearly 700 established funds managing assets just shy of £400 billion. It shows that one in six are failing investors by consistently underperforming the stock market indices that their marketing literature claims they will beat.
Despite this, Bestinvest estimates that investment houses earn a staggering £537 million a year in fees from these ailing funds. It says the charges, which eat into the returns of investors, are nothing but ‘reward for failure’.
In many cases, it adds, investors would have been better off putting their faith in a fund run by a robot that mechanically tracks the performance of an index such as the FTSE 100 (which comprises the 100 biggest companies listed on the London Stock Exchange) or the wider FTSE All-Share Index. The report is required reading for anyone with a portfolio built around funds, maybe held within a tax-friendly Individual Savings Account or a self-invested personal pension. At the very least, it should prompt investors to check that their existing portfolio remains fit for purpose or needs a shake-up.
It is also an essential tool for anyone looking to take advantage of their annual £20,000 Isa allowance by buying investments ahead of the end of the tax year in early April.
Although Bestinvest says some of the 111 poorly performing funds it identified could well recover, it believes many should be avoided.
Jason Hollands, a director at Tilney, says: ‘Investment managers often go through tough periods because their particular approach or investment process goes temporarily out of fashion. That is understandable.
‘But there are also times when fund managers either make bad decisions or start managing money in a different way to how they did in the past when they were more successful.’
His comments are aimed particularly at Neil Woodford, one of the country’s highest profile fund managers. He jumped ship from Invesco Perpetual more than four years ago to set up Woodford Investment Management. Bestinvest labels Woodford’s firm one of the ‘main culprits’ for disappointing returns – other big names include Invesco, Columbia Threadneedle and Artemis.
Hollands says the flagship fund, Woodford Equity Income, looks ‘very different’ to the funds he made his name in at Invesco – Income and High Income – due to its exposure to small firms. Woodford earned his reputation by holding stakes in big tobacco and healthcare stocks.
In response, Woodford Investment Management says: ‘Throughout his career, there have been times when Neil’s funds have underperformed the market because of a contrarian view – like now. In the past 18 months he has invested in UK domestically-exposed equities, which are cheaper now than he has ever seen, based on a view – which he doesn’t share – that the UK is about to go into recession.
‘ He believes there are risks in stocks whose share prices have risen on an increasingly false premise.’
The ‘worst’ funds are shown in the table below. They have failed to outperform their benchmark in each of the past three calendar years. Over the full 36-month period they have also provided a return at least 5 per cent below the benchmark.
Though the report focuses on poorly performing fund managers, it also lists funds that have consistently done well, such as Fundsmith Equity, which has turned £100 into £160 in the past three years.
The report comes hard on the heels of new rules announced by the Financial Conduct Authority to ensure investors can identify suitable funds. The regulator has long maintained that many investors do not get value for money. The report is available at bestinvest.co.uk/spot-the-dog.