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Let sleeping dogs lie

Make a cup of tea, sit down and prepare for a shock. Our research on the performance of funds in the Investment Management Association’s UK all companies sector shows that nearly three-quarters of them failed to outperform the FTSE All Share index over the last three years. We did the numbers again to check it wasn’t a fluke, this time over five and seven years. The figures were marginally better but only because of historical bias. Many of the dogs had been put to sleep and could not be included in our seven-year research.

A £1,000 investment three years ago in the poorest performing fund, CF JM Finn UK portfolio retail, would now be worth £1,231 before initial charges. The same money invested in the best performing fund, Saracen growth, which we hold within the T Bailey growth fund, would be worth £2,171 before initial charges. Invested in the FTSE All Share, perhaps through a tracker fund, it would be worth £1,605. (Figures from Lipper Hindsight).

OK, so it might not have been worth sitting down for but those figures are unacceptable. There are a lot of bad managers out there.

We all know that cumulative figures can be misleading and a spectacularly good or bad three months can affect all periods. With this in mind, let us look at three discrete 12-month periods in the three years under analysis, namely, the years ending August 31, 2004, August 31, 2005 and August 31, 2006.

Only 19 funds out of 278 in the UK all companies sector outperformed the FTSE All Share in each of the three periods and these managers deserve a lot of credit for achieving a difficult task. A total of 125 funds underperformed the FTSE All Share in each of those periods. That takes some doing, too.

Let’s give some praise to those 19 consistent performers: Saracen growth alpha, Old Mutual UK select mid-cap, JPM UK dynamic, Jupiter UK growth, Schroder UK mid-250, Majedie UK opportunities, SVM UK opportunities, Rensburg UK select growth, Standard Life UK opportunities, Artemis capital, Fidelity special situations, Merrill Lynch UK, Invesco Perpetual children’s, Axa Framlington UK select opportunities, M&G recovery, New Star UK growth, JPM UK strategic value, Majedie UK equity and Abbey National multi-manager.

There is a reason why many of these names appear in numerous fund of funds portfolios and have done for some time. We spend a lot of time carefully researching and monitoring funds. The good fund selection offered by funds of funds helps them to continue to deliver strong performance, more than justifying their extra fees.

Jason Britton co-manages the T Bailey growth fund

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