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Hounds on the run

The worst offenders in Bestinvest’s latest round of dog funds have found themselves hampered by exposure to UK small caps. Hannah Stodell reports

Bestinvest’s latest Spot the Dog blacklist reveals that £14.25bn worth of UK investors’ money is sitting in lacklustre funds.

The biannual study shows the number of these funds in the investment universe increased from 77 to 90 since the October study, with 96 per cent more assets in dog funds since the £7.2bn recorded in January 2009. To qualify as a dog, a fund must underperform its benchmark by 10 per cent or more cumulatively over three years.

In the same vein as October’s report, UK equity income features strongly with 18 dog funds, representing almost a quarter of the sector’s fund universe.

Henderson higher income, managed by Graham Kitchen and Andrew Jones tops the list of worst offenders, returning -37 per cent over three-years, as at March 31.

George Luckraft’s Axa Framlington equity income and monthly income funds also make a reappearance on the list. The report blamed their high exposure to smaller companies, which underperformed broader markets in the last six months. Scottish Widows’ UK equity income fund, previously its biggest dog fund, escapes inclusion.

Fund Intelligence investment director Chris Mayo says the list features some very poor funds but there are also a number of managers with decent long-term track records who have stuck to their process, even when their style of investing is out of favour.

He says: “The last few years of market volatility have left even the best managers behind. Luckcraft and Rathbones’ Carl Stick are two managers in the UK equity income sector who I would back over the long term. In respect of some of the other funds, size is definitely an issue in terms of underperformance.”

Whitechurch Securities senior analyst Ben Seager-Scott says many of the UK equity income dogs suffered with their barbell strategy.

He says: “This is a lot about UK smaller companies and what exposure the funds had to them. A lot of the bad dogs named have the larger caps for the yield and the smaller caps for growth – obviously, that kicked them. If you look at the one-year return, you have had a bounceback since last March in the smaller caps and most of the bad dogs have done better.

“As soon as the three-year period gets past 2008, all of these names are going to change anyway as they are all dominated by what their position was in the Q3 2008 crash.”

Thames River co-head of multi-manager Gary Potter says Luckraft’s portfolio has had a rough ride due to its structural bias to mid and small-cap companies but warns investors not to make a knee-jerk reaction based on historic performance.

He says: “We all know the market over the last couple of years has been heavily influenced by larger-cap directions and small caps have had a tougher time. But people have endured that pain, so to go and sell now in some cases is probably shutting the stable door after the horse has bolted.

“One could say funds that have been poor performers over two or three years are actually more likely to start to improve as conditions in the market alter.”

The UK all companies sector also has its fair share of mutts, with 34 funds representing 18 per cent of a sector universe of 194. Gartmore UK alpha and Henderson UK growth (ex-New Star) both swipe the top dog award underperforming the FTSE all-share benchmark by 39 per cent over three years, as at March 31.

The UK smaller companies sector fares slightly better with only two dogs out of a total of 47.

Henderson has eight under-performing dog funds following its integration with New Star. The combined group rises from fifth place in the October report to third, with more dog funds appearing than any other group.

Invesco Perpetual tops the dog list by assets under management with £1.7bn across three funds and is the only group with a dog fund in the US equity sector which underperformed its benchmark by 15 per cent. Schroders follows with £1.6bn of dog assets and Scottish Widows and F&C Asset Management are also in the doghouse with seven and three funds respectively.

Hargreaves Lansdown investment manager Ben Yearsley says the high number of dog funds at Henderson can be attributed in part to the merger but he says: “They have a bit of work to do in some areas, particularly the UK, as performance is not what it should be.”

Potter says a crude look at numbers does not tell the full story. He says: “To be fair to Henderson, with Bill McQuaker in charge of equities there is a new broom sweeping through those funds.”

City Asset Management investment director David Willcox says a process that does not screen out funds that have seen manager changes is a potential weakness but he supports efforts made to highlight funds that are underperforming.

He says: “We probably have too many funds and we need to ensure we are doing our jobs properly and recomm-ending managers that are outperforming their benchmarks – or at least performing in line. Otherwise, you might as well run a passive strategy.”


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