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Bestinvest lets the dogs out

Investors who placed their hard-earned cash with active managers in 2008 had a tough year, along with everyone else, as alpha became increasingly elusive in the bear market.

Bestinvest’s latest spot the dog report reveals over £7bn worth of investors’ money is currently sitting in continually underperforming ‘dog funds’, accounting for 12 per cent of the funds universe.

Scottish Widows Investment Partnership escaped Best Invest’s last issue but was back in the doghouse for Spring, topping the list as worst of the worst with six dogs totalling £674m, 12 per cent of the total group’s value of funds under management.

JP Morgan and Fidelity followed with their tails in between their legs as the next big bad dogs by value with £525m and £524m respectively in dog funds.

UK howlers were dominated by small and mid-cap focused funds with 50 per cent new entrants to the list. Amongst the worst performers cited were Rathbone special situations, Cavendish opportunities, New Star select opportunities and CF Techinvest special situations.

The report also flagged the sustained underperformance of former New Star manager Patrick Evershed: “The New Star manager must be in the running for the top dog award, albeit he has since resigned from the group; his fund has made regular dog list appearances dating back to 2007.”

According to Bestinvest, the big downfall of the UK’s dog funds was an over-exposure to micro-cap and AIM companies which have been severely de-rated over the last three years.

Spot the Dog reveals which fund managers are struggling and should be put on a tighter leash as well as those who should be put down.

To earn the ‘dog’ label a fund must have underperformed its benchmark in each of the last three years and by 10 per cent or more cumulatively over the period.

Given the vast amount of money under management in investment funds, Hargreaves Lansdown investment manager Ben Yearsley is surprised that the figure for failing funds quoted isn’t higher. He says: “Out of the £200bn under management in mutual funds and unit trusts, there’s probably a lot more than £7bn worth switching out of.”

One fund which has been dogged by performance issues is New Star’s heart of Africa fund which is to be shut down following reduced liquidity in the sub-Saharan African equity markets.

In a market update on Monday, New Star announced it is seeking a winding up of the fund which has been temporarily suspended since December.

It said: “It has become increasingly apparent that to reopen the fund to dealing would significantly disadvantage the remaining investors and after due consideration, and in consultation with the FSA, it has been agreed that the most appropriate course of action is to seek a winding-up of the fund.”

Last August the fund stood at £86m but upon suspension in December, it had fallen to £29m.

Its value has more than halved from a launch price of 47.38p to a current value of 22.63p.

New Star has agreed with the FSA an effective date of March 31, subject to formal approval, for the winding-up of the fund. Conditional on the successful disposal of assets, investors could expect to receive the proceeds shortly after this date.

Bestinvest senior investment adviser Adrian Lowcock says: “The closure of the New Star Africa fund is disappointing for existing investors, particularly as it has been closed for two months. This highlights the risks of investing in specialist funds operating in a new sectors.”

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