Are your savings suffering in a dog fund?

A new report names and shames the fund managers who are underperforming. It should make you think again about your investments. Simon Read reports
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The Independent Online

If you don't check your investments regularly, you're in danger of losing thousands. That's the warning spelled out in a report published last week that highlights the worst-performing funds in the UK.

The Spot the Dog report from independent investment manager Bestinvest reveals that the amount of cash people have tied up in poorly perfoming "dog" funds has soared by 196 per cent since last year.

The amount climbed from £7.2bn on 31 December 2008 to £14.22bn by the end of September 2009. "The survey highlights a massive level of investor inertia," warns Martin Bamford, financial planner at Informed Choice.

"Performance is only one factor in selecting a suitable fund, but it is the easiest to measure. Fund selection can make a difference to overall returns, with the contribution it makes to a portfolio marginal compared to the importance of asset allocation. Hopefully, the research will prompt investors, and their advisers, to review existing fund holdings and ensure they remain suitable."

The study of all UK-registered, open-ended retail funds such as unit trusts and OEICs is compiled biannually by Bestinvest's in-house research desk. It reveals the funds that have performed well below their recognised benchmark. To qualify as a dog, a fund has to have performed below the benchmark in each of the last three years and by at least 10 per cent over the past three years cumulatively, which weeds out tracker funds.

Despite the increased amount of cash kept by investors in dog funds, the firm says there is some good news. The number of overall dog funds has fallen from £82 to £78, and dog funds now account for 11.6 per cent of funds compared with 12 per cent earlier this year.

However, the bad news is that the worst performers have been the bigger funds, where UK investors tend to have a higher proportion of their cash invested.

"Big funds have returned to the dog house in the latest report," says Adrian Lowcock, senior investment adviser at Bestinvest. "The largest dog fund, Jupiter Income, has assets under management of £2.8bn.

"Equity income funds also feature more heavily in the figures, as they haven't benefited from the market rally which began in March. The upturn was driven by recovering banking stocks, many of which no longer pay a dividend. The holdings had to be sold in 2008 and will not reappear until they can reinstate the dividend.

"Our latest report highlights the huge number of assets being held in dog funds and illustrates how vital it is that investors review their portfolios regularly to ensure they are getting the best possible returns."

Fund manager Jupiter is the worst of the worst dog funds by dint of the poor performance of its £2.8bn Income fund, managed by Tony Nutt. In fact, the fund which holds shares in major blue chip companies such as BP, Shell, Vodafone and Centrica has grown by almost 20 per cent in the last six months. But its sector, UK Equity Income, has climbed by 25 per cent, leaving Jupiter's fund underperforming.

Alicia Wyllie, director at Jupiter, defends the fund. "As Bestinvest itself points out, Jupiter Income has only just slipped onto the list because their figures are rounded up," she points out. "Performance over three years has been broadly in line with the peer group and over the past year, five and ten years, the fund has beaten the average equity income fund. Furthermore, in Best's Spring 2009 report, Jupiter was named as top of their 'Crufts Candidates', which shows how volatile these reports can be.

"Jupiter Income has a focus on investing in high-quality companies with strong balance sheets that offer the best prospects for paying attractive, growing dividends over time. However, in the rally we have seen this year, there has been a 'dash for trash' with shares in lower-quality, highly indebted companies rising the most. Reinvesting dividends is the biggest driver of equity returns and we are confident that the fund's focus on quality companies will deliver for investors in the years of weak economic growth ahead of us."

Investment expert Brian Dennehy, of Dennehy Weller & Co, says that far from being a dog fund to avoid, now could be a good time to invest in the Jupiter Income fund.

"Investors don't buy fund management groups, they buy funds," he says. "If you own Jupiter Income, is that relevant to someone in Jupiter UK Growth, which has outperformed the sector and index over the last six and 12 months?

"Such analysis only adds value where it identifies perpetual dud funds not ones that are cyclically underperforming, like Jupiter Income, whose current underperformance is a strong buy signal."

He says Schroders appearing at number two in the list is also unfair. "While we have been critical of some aspects of Schroders funds in the last few months, performance of their key funds has been outstanding. Just look at Schroder Income," says Dennehy. "What relevance is it for someone in Schroder Income that Schroder European has not performed?"

Dennehy says investors should focus on funds rather than fund management houses. "Investors do need to regularly review the performance of their funds but this dog analysis is more likely to ensure investors lose the scent," he says.

Jason Witcombe of Evolve Financial Planning echoes Dennehy's comments but suggests it's wise not just to focus on performance but to look at other factors and maybe even consider tracker funds.

"No one can predict the future so this year's dog could be next year's star performer," Witcombe points out. "We urge clients to focus on the aspects of investing that they can control. One of these is costs. Most funds charge the earth in management fees and deliver little. By adopting a low-cost, index-tracking approach, you can slash the cost of your portfolio, which should deliver better performance in the long run."

Trackers recommended by Witcombe? "We use Vanguard, Dimensional and L&G funds," he says.

* For a free copy of the Spot the Dog Fund guide go to www.bestinvest.co.uk/dogs

* Go to www.topfundsguide.com for sectoral performance tables and help on how to choose funds and build a portfolio

Members of the kennel club: Funds to avoid

The worst five fund management groups by 'dog assets under management', according to Bestinvest's researchers

Jupiter (£2,970m)

With nearly £3bn of assets under management, Jupiter enters the table in the embarrassing top spot. A dog candidate last year, their official appearance as a dog is down to the performance of just one fund Jupiter Income.

Schroders (£1,762m)

The Schroder European fund continues to disappoint and the inclusion of Andy Brough's UK Mid 250 fund has caused a 591 per cent rise of Schroder assets under management in the dog house.

Scottish Widows/SWIP (£1,677m)

The value of its dog funds has risen to 1.677bn (over 25 per cent of the group's entire funds). This is caused by equity income funds entering the doghouse, as well as a range of Japanese and emerging market funds making a reappearance.

St James's Place (£945m)

A new entry! In January this year, it had no dogs, now two of its eight funds qualify, representing around 33 per cent of assets under management. Management was outsourced to Taube Hodson Stonex. Founded by Nils Taube, John Hodson and Cato Stonex, the company has suffered, following the death of Nils Taube, aged 79, in March 2008.

Henderson New Star (£705m)

At the time of the last Spot the Dog Guide, the merger of Henderson New Star was still being completed. The combined group ranks fifth in the dog house league of fund management groups, the same as in January 2009. The merger appears to be progressing well and Henderson has halted the poor performance at New Star. However, right now, three of its own funds have entered the dog house compared to just one previously.

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