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."

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Suggested Topics
PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Software Development Manager

    £40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

    Ashdown Group: Product Manager - (Product Marketing, Financial Services)

    £30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

    Recruitment Genius: Compliance Assistant

    £13000 per annum: Recruitment Genius: This Pension Specialist was established ...

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Day In a Page

    As in 1942, Germany must show restraint over Greece

    As in 1942, Germany must show restraint over Greece

    Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
    Britain's widening poverty gap should be causing outrage at the start of the election campaign

    The short stroll that should be our walk of shame

    Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
    Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

    Homeless Veterans appeal

    The rise of the working poor: when having a job cannot prevent poverty
    Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

    Prince Charles the saviour of the nation?

    A new book highlights concerns about how political he will be when he eventually becomes king
    How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

    How books can defeat Isis

    Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
    Judith Hackitt: The myths of elf 'n' safety

    Judith Hackitt: The myths of elf 'n' safety

    She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
    The open loathing between Barack Obama and Benjamin Netanyahu just got worse

    The open loathing between Obama and Netanyahu just got worse

    The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
    French chefs get 'le huff' as nation slips down global cuisine rankings

    French chefs get 'le huff' as nation slips down global cuisine rankings

    Fury at British best restaurants survey sees French magazine produce a rival list
    Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

    Young carers to make dance debut

    What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
    Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

    Design Council's 70th anniversary

    Four of the most intriguing prototypes from Ones to Watch
    Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

    Dame Harriet Walter interview

    The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
    Art should not be a slave to the ideas driving it

    Art should not be a slave to the ideas driving it

    Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
    Bill Granger recipes: Our chef's winter salads will make you feel energised through February

    Bill Granger's winter salads

    Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
    England vs Wales: Cool head George Ford ready to put out dragon fire

    George Ford: Cool head ready to put out dragon fire

    No 10’s calmness under pressure will be key for England in Cardiff
    Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

    Michael Calvin's Last Word

    Time for Old Firm to put aside bigotry and forge new links