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There is growing concern among IFAs that the constant drip of negative coverage of poorly performing funds, such as Bestinvest’s Spot the Dog report, will deter consumers from investing.

Bestinvest’s latest report, offered to consumers online or via a freefone number, uses a series of filters to identify 85 underperforming funds. First, they must have underperformed their benchmark in each of the last three years and, second, they must have underperformed their benchmark by at least 10 per cent over the three-year period.

Scottish Widows is ranked as the top dog, with £1.55bn in “dog” funds out of a total £11.08bn under management. Prudential, with a total of £8.84bn invested, has £940m in “dog” funds, representing 11 per cent of its funds by volume. Insight, with £3.07bn invested, has £670m in “dogs” or 22 per cent of the total.

Henderson, New Star, and Fidelity also feature in “Dog Row”.

While the report says inclusion in Spot the Dog does not automatically indicate a sell, it advises readers not to stand still if they hold any of the funds listed.

The report goes on to mention Bestinvest’s Manager Record index, which tracks the performance of fund managers by analysing their career track records. Readers are invited to log on to Bestinvest’s website to find out more.

But IFAs want fund managers who add value instead of merely replicating an index. With 75 per cent of funds failing to beat the market, fund managers with insight, intellect and the ability to form their own opinions are invaluable.

Some IFAs feel that while Spot The Dog draws attention to the importance of a fund manager’s track record, it leaves readers without the knowledge necessary to choose new funds. This is where Bestinvest hopes to generate new business. But IFAs are sceptical about the firm’s motives.

Hargreaves Lansdown investment manager Ben Yearsley says: “This kind of thing obviously gets a lot of press coverage and it is good PR. But does this really help IFAs? We often promote funds that are at the bottom of the fund list because sector comparison can be misleading. Continual negative stories do not convince people they want to invest.”

IFAs sometimes choose poorly performing funds for investors, speculating on a turn-round. One example of such a fund is Framlington’s equity income fund, which between September 2001 and September 2002 fell by 18.7 per cent. Of 67 funds in the sector, it was ranked 64th. But since September 2002, when George Luckraft took over management of the fund, it has grown by 69.79 per cent and is now ranked third in the sector.

Such is its success that Framlington recently announced the fund is to “soft-close” in February 2005. A flea-bitten fund has been turned round by a manager of top pedigree.

By contrast, Fidelity’s UK special situations fund will face questions when star manager Anthony Bolton eventually leaves.

Bestinvest feels that fund managers must accept their failings. Head of communications Justin Modray says: “Our experience is that this highlights the need for an IFA. Historically, we find that the majority of funds on the list are ones offered by tied advisers, such as the Scottish Widows fund. The Spot The Dog list is a call to action for investors, which I am sure benefits other IFAs too. This is something that people seem to enjoy and that we believe in.

“The most frustrating thing is that we are still seeing funds, like the Prudential growth fund, that investors seem to stay with year on year because of laziness and inertia.”

The value of Spot the Dog is questioned by IFAs because firms such as Fidelity and New Star, which are considered strong performers, feature in the top six.

New Star, which has £1.22bn in “dog” funds out of a total £3.16bn invested, has suffered from its acquisition of Aberdeen’s big fixed-interest fund. So New Star is included, even though seven of the eight equity funds launched under its own brand are in the top quartile.

Marketing director Rob Page says: “Whether this list exists or not does not present us with a particular problem. While some of our funds will take longer to improve than others, our performance across the board is superb and IFAs recognise that.”

Bestinvest feels the inclusion of New Star in the list is a surprise and does not expect it to be a long-term “dog”.

Fidelity is the biggest fund manager in the world, with £14.85bn invested. While it has £950m in “dog” funds, this represents only 6 per cent of the total and IFAs continue to rate the firm highly.

For better or worse, the Spot the Dog report prompts questions about what makes for good fund management. Opinions vary.

Michael Philips proprietor Michael Both says: “The report offers a valuable service in highlighting when a fund manager has done badly. Often the reasons presented for poor performance do not bear scrutiny. I am a great believer in the idea that the bloke behind the fund is what you are really looking at.

“Some fund managers charge large annual management fees when they are closet index trackers. That is not really doing much management, apart from occasionally reading the Financial Times.”

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