Warning! Watch out for the funds that are shrinking your savings
Several 'cautious' funds have cropped up on a worst performers list. Simon Read asks whether you should sell or be patient.
If you have cash stashed away in the Barmac Castleton Growth fund, it may be time to rethink your investment plans. The fund was identified this week as the worst underperformer over three years following analysis by Chelsea Financial Services.
Chelsea regularly names and shames the worst performers, but this year it has introduced a new Drop Zone to pinpoint funds which have underperformed their sector averages by the largest amount. The 10 funds on the new list contain nearly half a billion pounds of investors' cash.
The list gets its name because "we believe these funds should be dropped like a hot stone from investment portfolios", said Darius McDermott,the managing director of ChelseaFinancial.
More than half the funds identified are from the old Cautious Managed sector. The name was changed last year to the Mixed Investment 20%-60% Shares sector following criticism that the old name misled unwary investors into funds that were far from being as safety-first as the name suggested.
"It is interesting to see how funds in the former Cautious Managed sector feature in the list," said Danny Cox of Hargreaves Lansdown. "Unfortunately bonds haven't been immune to the financial crisis, particularly in the banking and financial sectors, although gilts funds were among the best performing in 2011."
Jason Witcombe, a financial planner with Evolve, said part of the reason for the sector's poor showing was the wide variety of funds allowed in it. "If you have a sector that allows 20 per cent to 60 per cent investment in shares, that it is a very broad spectrum," he pointed out.
"In a bad year for equities the fund holding 20 per cent equities will do best. But over a longer time frame one would expect the fund holding the maximum permitted equities to outperform, with risk being rewarded. It is therefore very difficult to compare like-for-like in a mixed sector like this."
Mr McDermott was more scathing about the funds. "That a sector of funds deemed to be of limited risk can underperform by such a huge amount is simply unacceptable," he said. "Even more troubling is the fact that the sector has been one of the most popular among investors recently, suggesting a large number of people could be holding dud funds in their portfolios."
Outside the Drop Zone, the report included funds from well-known investment houses, including Jupiter's Undervalued Assets and Neptune's Cautious Managed. Mr McDermott noted: "Jupiter has finally taken action and has just announced that it is putting in place a new manager to turn the fund around.
"But Neptune surprises us as the fund is run by Robin Geffen, a manager with an excellent track record on other funds. It appears he was too cautious, as a high allocation to cash in 2009 and 2010 meant he missed the market rally, just proving that risk isn't all about high allocation to equities."
Patrick Connolly at AWD Chase de Vere said Neptune's woes demonstrated why investors shouldn't make decisions based solely on past performance. "Too many people have done so in the past and have ended up buying funds at the top of the market and selling at the bottom.
"If a fund has under-performed, don't just ditch it. Instead it is important to understand why it has under-performed and whether anything is likely to change in order to reverse this."
He pointed out that investment timing can make a difference, and anyone taking cash out of a fund on the basis or poor recent performance could regret it if the fund then reversed the trend.
"An investor may sell a fund, and incur charges for buying a new fund, just as the original fund is positioned to perform well," he said.
Mr Connolly urged investors not to rush into a decision based on the Chelsea Financial report. "This type of analysis is very helpful but it should lead to investors asking questions of the funds they hold, rather than providing the whole answer for them," he said.
Mr Witcombe at Evolve also warned against taking action on the basis of the report. "Fund management is not like football. The winners don't always keep winning and the losers losing.
"In fund management last year's winner can easily be next year's loser," he said. "Have a look at the best performing funds of 2011, dominated by UK fixed interest funds, and see if you fancy investing in them in 2012."
Martin Bamford, the managing director of the adviser Informed Choice, said: "We often find that investors who do not have the benefit of advice hold on to underperforming funds fortoo long.
His view is that many managed funds are a waste of time. "Investors should have ditched managed funds yearsago, instead taking control over their portfolios by selecting funds in each asset class in suitable proportions to meet objectives.
"Leaving asset allocation decisions up to a distant fund manager who often sticks very closely to the sector is a recipe for investment disaster," Mr Bamford said.
Mr Witcombe said one alternative was to look at index-tracking funds. "If we look at underperformance over a long period of time, the compounded effect of high charges on actively managed funds is going to be a big factor. Fund charges are something that investors can control and this is why much lower-cost index-tracking funds are proving to be increasingly popular."
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