Number of serially under-performing investment funds has increased by a fifth, survey reveals

The new Spot the Dog survey shows that even famous fund managers, holding billions of pounds of our money, can make mistakes
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The Independent Online

The number of serially underperforming investment funds has increased by a fifth in the last six months, according to the latest Spot The Dog research from the adviser Tilney Bestinvest. The report, published today, highlights the importance of keeping a close eye on your investments to ensure that performance is up to scratch.

Many giant investment funds are labelled "dogs" and rightly so. To be handed the negative award, they must have been stinkers for some time. To qualify ,they must have underperformed the market in each of the last three years – and by at least 10 per cent or more over the three years.

There are plenty of them. In fact the amount invested in the funds identified has soared by almost £4bn in the last six months, from £19.6bn in July 2014 to £23bn today.

Chief among them is the mighty M&G Recovery fund, which, despite its consistent underperformance, still accounts for £5bn of investors' money. For poor returns it sits alongside M&G Global Basics, which has £2.6bn worth of investors' money. The two account for a third of all the dog fund assets listed.

Their underperformance is down to poor stock selection and sector allocation decisions, reckons Tilney Bestinvest, which adds that the Recovery fund's problems are exacerbated by the massive size of the fund.

The fund analyst Morningstar this week downgraded M&G Recovery to a bronze rating from a previous gold rating. It said it is "concerned by the continued outflows from the fund, which have been nearing all-time highs in recent months".

Others are slightly more positive about it. "The M&G Recovery fund has had a very difficult time but we still rate it as a hold," says Darius McDermott of Chelsea Financial Services. "We still have faith in the manager."

That's Tom Dobell, who has been at the helm since March 2000. His consistency is a good thing, Morningstar concedes: "Mr Dobell has remained true to the process that has been successful in the past and we believe the fund still has merit."

Given that some experts still suggest the fund has a potentially decent future, despite its recent underperformance, is there any point to surveys such as Spot the Dog? "Yes," says Mr McDermott, whose firm publishes its own regular, similar survey – The Red Zone, which is due to publish its latest report next month.

"Surveys such as this one are useful. They're not just pointing out funds that consistently underperform. They also encourage people to review their portfolio, which they really don't do often enough." Jason Hollands, managing director at Tilney Bestinvest, makes the same point: "Many investors put up with weak fund performance by either not monitoring their investments regularly, receiving poor service from the adviser who originally recommended the investment, or through simple inertia.

"The differences in performance between funds within the same sectors can vary enormously, so it is vital to be very selective when choosing."

He continues: "With the returns from Isas and pensions potentially determining how secure an investor is in their retirement, it really is vital to keep a beady eye on performance and to make sure a portfolio stays in good shape."

Of course, it's not just M&G that's highlighted in today's shaming survey. The fund giant Aberdeen has nine funds included, up from just one in the previous report. But that's mainly because of its acquisition of SWIP, whose funds previously featured prominently in Spot the Dog. Meanwhile Neptune is the only other firm that has multiple funds in the report – five.

On a positive note, no UK equity income fund has been awarded a dog label, with even the average fund in the sector outperforming the UK stock market in each of the last four 12-month periods.

And many large asset management groups have avoided having any funds being labelled dogs, including Henderson, Invesco Perpetual, JO Hambro CM, JP Morgan, Legal & General IM, Liontrust, Royal London, Threadneedle and Standard Life Investments.

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