Coronavirus: Underperforming 'dog' funds hit record levels

Lucy Harley-McKeown
·3 mins read
Digital generated image of financial line chart showing fallings because of coronavirus COVID-19 on blue background.
Digital generated image of financial line chart showing fallings because of coronavirus COVID-19 on blue background.

A record-breaking 150 funds have underperformed the market this year, in a more than 50% increase from the last time the same research was carried out.

Tilney’s and investment service Bestinvest’s annual report of “dog” funds — ones that underperformed indexes — showed a 65% increase from the 91 funds in its last report. This is the highest number on record and a sign of how much coronavirus has roiled financial markets.

The Spot the Dog report found the level of assets held in “dog” funds has also increased significantly to £54.4bn ($69.6bn), up from £43.9bn in the last edition.

Although there are many more funds included than last time, many of these are small in size – with the median fund being valued at £133m.

The report applies two filters to identify underperforming funds: First it looks at the fund universe to identify those that have failed to beat the benchmark over three consecutive 12-month periods.

The second criteria is that the fund must have underperformed the benchmark by 5% or more over the entire three-year period of analysis.

There are 18 funds which hold over a billion in assets from prominent fund groups. Of these, Invesco (IVZ) is crowned “top dog” for the fifth time, with 13 funds worth £11.4bn of assets. The combined value of assets represents 21% of all dog fund assets.

St. James’s Place (STJ.L) also ranked highly with eight “dog” funds totalling £6.9bn, while blue chip fund manager Schroder (SDR.L) is notable for now having 10 funds included with a combined value of £2.7bn, according to the report.

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Private equity income and global equity income saw the highest proportion of dog funds, representing 26% and 25% respectively. This, in part, reflects the slew of dividend cuts during the COVID-19 pandemic and the outperformance of “growth” stocks, according to the report.

Overall the lowest proportion of dogs were found in the UK “All Companies” and “Global Emerging Markets sectors,” both of which had just under 11% of their eligible fund universes classified as dog funds.

The report found that serious, consistent underperformance was rare among funds focused on smaller companies – parts of the market which are poorly researched by analysts and where there are more opportunities for fund managers to add value by spotting hidden gems.

Those that have avoided the list include Aviva Investors, Baillie Gifford, BlackRock, Evenlode, Fundsmith, JO Hambro Capital Management, Lindsell Train and Stewart Investors.

Jason Hollands, Managing Director at Bestinvest, said: “Markets have given investors a rollercoaster ride this year. The COVID-19 crash between late February and the end of March was very rapid but the rebound in stock markets since then has been impressive.

“However, look beneath the bonnet and there have been big disparities in performance across industry sectors. The relative winners have been areas like technology, online stocks and consumer staples companies, but at the other end of the spectrum major sectors like energy and financials have been hit really hard.

“This has resulted in very wide disparities in performance between fund managers, depending on where their funds were positioned.”