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You do not need to be familiar with the terminology of financial markets to know that when a financial fund is labelled as a dog fund, this is not meant as some fond term of endearment. Rather than being something fluffy and family-friendly, a dog fund is one that has delivered worse returns than the market it invests in for three consecutive years, and by more than 5 percent over the entire three year period.
The online investment service Bestinvest has highlighted the growing problem around dog funds and estimates that investors hold almost £55 billion in poorly performing funds. The company has identified 111 such funds with fleas, a figure that almost doubled from the 58 just 6 months ago and more than quadrupled from the 26 identified in February of 2018.
Included in this roll call of dishonour are some of the industry’s most popular funds managed by pedigree firms like Fidelity, Invesco and Schroder; funds that include the Invesco High Income fund with assets of almost £8bn and the LF Woodford Equiry Income Fund managed by Neil Woodford, one of the UK’s best known fund managers. Performance of the latter is so modest that had you invested £100 three years ago then it would be worth a mere £87 now.
Unsurprisingly, when funds underperform it’s the investors who suffer rather than their fund managers who, Bestinvest estimate, earn £537m in annual fees from their funds that belong in the pound. And while modern markets know no geographical boundaries, there’s a disproportionate number of UK funds that dominate the roll of dog fund dishonour: from the 290 funds that invest in UK companies, 59 were classed as dogs, equating to more than 20% of the total.
So what are the reasons for the sharp rise in this modern phenomena? Brexit uncertainty comes into the reckoning as does the strategy by many of the poorest performing UK funds of investing heavily in the sort of medium sized and dividend-producing companies that have struggled amidst adverse market conditions in recent years.
While mitigating circumstances might exist, market conditions shouldn’t let managers off the hook when it comes to consistently poor performance - especially while there are funds out there like the best-in-show TB Evenlode Income which climbed ahead of the market by 13% over three years raising the value of a £100 investment to a giddy £135.
This raises the question of whether you should sell your underperforming dog fund or hold on for better days. This is a decision which should only be taken after some research as funds can bounce back from rough patches and investment firms might already have taken action to improve performance, such as the appointment of a new manager. Another option if you not willing to take the risk of managerial underperformance is to invest in index tracker funds.
The purpose of this article is to provide technical and generic guidance and should not be interpreted as advice or a personal recommendation.
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