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Dog daze

Chris Salih assesses the latest Chelsea FS analysis of funds which have failed to keep up with the market rally

Scottish Widows has retained the wooden spoon in Chelsea Financial Services’ latest relegation zone list.

Just as in the last report in September 2009, Widows has a total of seven funds in the list, including its £1.6bn UK growth fund.

Investors will raise eyebrows at the latest list as, despite a 10.6 per cent rise in the FTSE 100 since September 2009 and a 12.8 per cent rise in the MSCI global emerging markets index, the assets and number of funds that qualify for the list have grown.

Total assets in the dog list now stand at just over £13bn, up from £10.2bn in September 2009, while the number of funds has risen from 67 to 80.

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

Managing director Darius McDermott says: “Unfortunately, it appears that some fund managers find it just as tough, if not tougher, to keep apace with their peers when markets are rising. This time round, there are plenty of new entries including some big names that have fallen from grace, a glut of ethical funds and a large number of multi-managers.”

In addition to the £1.6bn UK growth fund, Scottish Widows has the only other billion-pound fund to make the list in the shape of the £1.2bn Swip highyield bond fund. It also has the fourth-biggest with the £723m Swip multi-manager UK growth fund.

Other Scottish Widows funds on the list are Scottish Widows emerging markets, Swip UK income and two UK smaller companies funds offered by Widows and its investment house.

’It appears that some fund managers find it just as tough, if not tougher, to keep apace with their peers when markets are rising’

McDermott says the group needs to get its investment business in order. “A number of its funds across the large range have long track records of underperformance and this needs to be addressed. The one positive that could be taken from this year’s list is the omission of the Scottish Widows corporate bond mega fund – this fund had dropped anchor in the red zone for a number of years but looks now finally to have turned a corner.”

Scottish Widows/Swip says: “The total value of funds in the survey represents less than 3 per cent of Swip’s total funds under management. 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 gong for worst performer went to the UBS absolute return bond fund, which is down an eye-watering 59.18 per cent from its sector average, based on three-year cumulative performance.

Absolute return funds are designed to achieve a positive return in any condition and bonds were the place to be in 2009 for investors.

McDermott says: “The dismal performance of this fund adds fuel to the scepticism over these types of strategies and takes away from the solid performance of established absolute return strategies like BlackRock UK alpha.

“UBS need to look long and hard at the investment objective and strategy of this fund.”

Above UBS absolute return bond fund on the worst performers’ list was Legg Mason Japan equity and New Star UK growth, which have fallen by 32.5 and 32.2 per cent respectively from the sector average over the same three-year timeframe.

McDermott also highlighted the underperformance of both Artemis and JP Morgan Asset Management in the list.

Artemis’s SmartGarp system looks to find companies on low valuations with good growth prospects unloved by others but has struggled in recent times and has resulted in changes to the system. Performance has yet to turn and the previously top-performing £419m European growth fund and its £401m capital fund have qualified for the list.

Artemis fund manager Philip Wolstencroft, who designed SmartGarp, admits performance has been disappointing.

He say: “Years like 2009 tend to challenge evidence-based investors like us. By waiting for the evidence of an improvement in trading conditions, we tend to miss out on the initial bounce in share prices.

“The fundamental relationship between changes in companies’ earnings and their share price performance, which our process relies on heavily, has been disrupted for an unusually long time.

“But in the long run, the relationship between where a company’s earnings are heading and where its share price goes will always re-establish itself. That is why our investment process has delivered outstanding returns in prior years.

“It is also why we believe that, in an environment characterised by a muted and patchy economic recovery, the European growth fund is well placed to meet our investors’ expectations once again.”

JP Morgan has three funds in the list, including its popular UK dynamic fund, which was temporarily closed to new investment in 2006.

McDermott says the trouble started for that fund when star manager Ajay Ghambir left the firm in 2007.

He says: “Into the breach came the existing team, but as we see time and time again fund management is no easy science and the team have since been unable to replicate Gambhir’s success. This case in point highlights how much a good active manager can bring to the table.”


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