Take your fund at face value … and you could end up in the dog house, with other poor performers
No coincidence that some of the worst funds aren't doing what you expected when you originally bought them
Sunday 27 January 2013
You might be surprised to discover what some of the largest funds run by star managers are investing your money in, and could find it is not what you thought you signed up for in the first place, or that they are not as "safe" as they seem.
The latest "Spot the Dog" guide by Bestinvest reveals the worst-performing funds in the market. And it's no coincidence that some of the funds in the doghouse aren't doing what you expected when you originally bought them.
Among the worst of them is the BlackRock UK fund, which was managed by Mark Lyttleton until early last year. Over three years, the fund would have turned your £100 into a measly £111 at a time when the UK market has enjoyed relatively strong growth. Although the fund has seen a change in manager, with Nick Little taking over, it has not seen a transformation in fortunes, with performance still languishing at the bottom of the tables.
However, if you bought into Mr Lyttleton's investment process when you got the fund, you might not realise the new manager is quite different and that, ironically, had Mr Lyttleton stayed in charge of the fund, his style would over the last year probably have brought performance back.
"The BlackRock UK fund has had a torrid time," says Peter Sleep, a fund manager at Seven Investment Management. "Mr Lyttleton invested in a lot of small and mid-sized companies, and a lot of resource firms, which have been out of favour for the past four years.
"He was replaced by a fund manager that bought stable, high dividend paying companies – that had done well over those four years. This was unfortunate, because for the past six months it is the small stocks and resource companies that have performed well, while stable, high dividend paying companies have underperformed," adds Mr Sleep.
And it certainly hasn't gone smoothly in recent years for Anthony Bolton, who was one of the UK's top fund managers not too long ago. Those who latched on to Mr Bolton's reputation as a top investor and bought his Fidelity China Special Situations trust in the hope he could replicate such stellar returns have been sorely disappointed. But if you look a little deeper, you might also be flummoxed by some of the things he has bought, which are a far cry from the Chinese shares you may have thought filled the fund.
"At least some of his poor performance comes down to owning smaller Chinese companies, but investors might find a few unusual investment choices," says Ben Seager-Scott, an analyst at Bestinvest.
"During the first year of the fund's life, the biggest loss of value wasn't an investment in a stock at all – the manager spent a large slug of investors' money buying a form of insurance on the South Korean stock exchange, as he was seriously worried about an escalation in the conflict between North and South Korea," adds Mr Seager-Scott.
"Clearly the newcomer to the region thought he knew something no one else did, as I'm not aware of any other managers – even some of the well-established regional experts – that thought this kind of event of was a reasonable possibility."
Although there is an element of trust when you hand over your money to a fund manager, you should be aware of what is in the fund. "People used to look at fund names, such as UK equity income, and think they knew what it's going to deliver," says Philippa Gee, who has her own wealth management firm. "But it's not the case – these funds can vary widely in terms of what they invest in – so don't just buy a fund name."
But just because you might find a few surprises, it doesn't mean the fund is a bad investment. On the contrary, one of the best-performing managers, Neil Woodford, who oversees more than £30bn, buys large chunks of tiny companies you've probably never even heard of.
However, while he may be widely renowned for investing a large amount of your money in the huge, "safe" tobacco and pharmaceutical companies, he also owns more than half of certain small companies that aren't "listed" and don't trade on the stock exchange – making them riskier.
"What's less well known is that, because of the size of the fund, he has positions in small unlisted companies," says Adrian Lowcock at Hargreaves Lansdown. "There is potential extra risk here, because if there is a crisis, he would struggle to sell out of those companies.
And as they are not on an exchange, they are difficult to value."
However, even though Mr Woodford owns a lot of some smaller companies, he runs so much money that they only amount to a tiny percentage of his funds. "Your first reaction could be 'hang on, he owns a big stake in this tiny company – that's huge'," says Graham Duce, a fund of funds manager at Aberdeen.
"But in terms of how much of the Invesco funds that actually represents, it's a very small amount. While he has got sizeable stakes in companies, he's not risking large amounts of capital for investors."
Mr Woodford has 21 unlisted companies – only 4 per cent of the Income fund. "These are riskier because they are new ideas," says Will Deer at Invesco Perpetual. "But if we get them right, we expect to put more money into them." Mr Deer adds that, while the likes of AstraZeneca and GlaxoSmithKline are today's giants, Mr Woodford is trying to uncover tomorrow's.
Still, smaller companies and those not on the stock exchange are definitely riskier, and less capable managers could run into trouble. "Some have come unstuck buying unlisted stocks, like Morgan Grenfell a few years ago," says David Coombs at Rathbones. "If a big manager were to put 20 per cent of the fund in unlisted stocks, I'd be pretty annoyed."
Mr Coombs also highlights that if a UK manager, for example, buys overseas shares – which they are able to do up to a limit – you need to see if there is any crossover with your other investments. For example, Mr Woodford owns the Swiss group Roche, and some of the other large European managers will hold this company too.
Although it requires a little more work, looking beyond a fund's name and asking your adviser or the fund group questions about the nature of its investments definitely pays off, and will help prevent surprises at the quirkier holdings over time.
Emma Dunkley is a reporter for Citywire.co.uk
In an earlier version of this story we mistakenly reported that Raven Russia is an unlisted company it is in fact a member of the FTSE 250 share index.
- 1 Tunisia hotel attack: Locals form 'human shield' to protect hotel from gunman Seifeddine Rezgui
- 2 Russian officials ban yoga because it's too much like a religious cult
- 3 German ethics council calls for incest between siblings to be legalised by Government
- 4 Ginger Pride festival to take place next summer, organisers say 'time of bullying gingers is over'
- 5 Facebook rainbow profile pictures likely being tracked by social network
The moment a Queen's Guard soldier lost it and drew his gun at annoying tourist
Greece crisis: IMF was pushed around by Angela Merkel and Nicholas Sarkozy – and now it is being humiliated
Greece crisis: The wider lesson is that it’s time to abandon this failed experiment in currencies
'I wish the BBC would stop calling it Islamic State' – David Cameron unleashes frustration at broadcaster
Pentagon accuses Russia of 'playing with fire' over nuclear threats towards Nato
They are neither a 'state' nor 'Islamic': Why we shouldn't call them Isis, Isil or IS
iJobs Money & Business
£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....
£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...
£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...
Negotiable: Recruitment Genius: This extremely successful and well-established...
Day In a Page
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.