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£14bn in the drop zone

Over £14bn of assets now sit in consistently underperforming funds, according to Chelsea Financial Services’ latest relegation zone report.

Despite markets improving to the end of April, the total number of fund in the list has increased from 79 to 85, with a number of big names in the fund manager community joining the list.

As with the past couple of relegation zones, the tag of biggest underperfomer goes to Scottish Widows, which has a total of nine funds in the relegation zone, up from seven in the previous list.

Among the nine funds are the two big funds in the 85-strong relegation zone list, with the £1.6bn Scottish Widows UK growth and £1.1bn Swip high-yield bond fund. Also included on the list is the £737m Scottish Widows UK equity income fund.

Chelsea Financial Services managing director Darius McDermott says: “Much that needed to be said on Scottish Widows has been said already, but they have a number of large funds that are consistently underperforming. The fact that a number of its UK funds sit in the list is also a concern, aside from Peter Cockburn, there is not much else of note on the UK team.”

Swip says the funds in the survey represent 2 per cent of total funds under management. A spokesman says: “Market conditions have been particularly difficult recently which of course has had an impact on fund performance. However our aim is to deliver excellent performance for all our investors. We therefore continue to actively address performance issues in the funds identified in the survey.”

The biggest six funds in the relegation zone actually account for 40 per cent of all the assets in the list. With the two Scottish Widows’ funds being followed surprisingly by the £951m Invesco Perpetual UK growth fund managed by Martin Walker.

McDermott say: “This was a surprise as it is Invesco and their UK desk and you just do not expect that sort of thing to happen.

Walker took on the fund following the departure of Ed Burke in 2008. It is currently fourth quartile over three years in the IMA UK all companies sector.

Chelsea decides which funds are eligible for the list through a quantitative screening process, with funds that are third or fourth quartile each year for three consecutive years becoming eligible.

Other big names on the list include the likes of Schroder’s Andy Brough, whose UK small-cap fund has underperformed, while George Luckraft’s Axa Framlington UK equity income fund makes a swift return to the list, having escaped the previous naming and shaming.

McDermott says: “We have and still do hold a high regard for George Luckraft but the fact is the fund has underperformed due to positions held in industrials and healthcare.”

UBS has retained the gong for biggest underperformer with its absolute return bond fund falling by 63.49 per cent from its sector average, based on three-year cumulative performance. MFM techinvest special situations was the secondbiggest loser, down by 33 per cent and Melchior Asian opportunities was third with a loss of 30.61 per cent.

McDermott also highlighted the underperformance of a number of multi-manager funds in the list, citing the additional charges that traditionally come with investing in fund of funds and manager of manager strategies.

He says: “The Aberdeen multi-manager emerging markets fund has a total expense ratio of 2.97 per cent and the City Financial GHC multimanager UK equity fund is 2.96 per cent. I really don’t think that investors should pay multi-manager fees for single sector offerings, multi-asset is a different skillset but for fund selection that should not be the case. Skandia UK best ideas has a TER of 2.34 per cent and, despite the changes, it has not improved.”


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