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.
Questions Of Cash: 'Your bank card may have been cloned'
Government's Pension Wise guidance service is up and running
Bargain Hunter: BT improves its mobile reception with 'incredibly competitive' deals
Mark Dampier: What price equities when cost cutting does nothing for profits?
Offset your mortgage and save thousands
- 1 Finland schools: Subjects scrapped and replaced with 'topics' as country reforms its education system
- 2 The West has it totally wrong on Lee Kuan Yew
- 3 #FreeTheNipple: Women in Iceland bare breasts in solidarity with trolled student
- 4 Scientists have discovered a simple way to cook rice that dramatically cuts the calories
- 5 Zayn Malik quits One Direction: Hundreds of workers request compassionate leave following band member's exit
Nigel Farage brands LGBT activists 'filth' and 'scum' and accuses them of scaring away his children after they invade his local pub
Ukip supporters are 55 or older, white and socially conservative, finds British Social Attitudes Report
JK Rowling responds to fan tweeting she 'can't see' Dumbledore being gay
Russia threatens Denmark with nuclear weapons if it tries to join Nato defence shield
Jeremy Clarkson sacked live: Alan Yentob 'wouldn't rule out' ex Top Gear host's BBC return
Germanwings plane crash live: Co-pilot Andreas Lubitz wanted to 'do something people would remember him for'
iJobs Money & Business
Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...
Negotiable: Recruitment Genius: You will be the first point of contact for all...
£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...
£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...
Day In a Page
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
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
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000
A two-bedroom flat with an open plan kitchen and two balconies, close to Arsenal station