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Nearly £8.5bn in legacy equity income funds underperforms

There is nearly £8.5bn in “drifted” legacy UK equity income funds that have underperformed against the sector over the past decade, research has found.

As the fund management industry awaits Mifid II next year, Morningstar has analysed the competitive UK Equity Income sector on behalf of Money Marketing and found about 10 per cent of the sector’s assets (£86bn) are in long term underperforming funds.

Findings show that many outdated, non-core funds have been sold by the asset managers that have seen most of the corporate activity in the past, or where most fund managers have moved around.

Funds in the research belong to firms such as Aberdeen Asset Management, M&G, Scottish Widows, Columbia Threadlneedle, Axa Framlington, Fidelity, HSBC, Henderson, JP Morgan, and Standard Life Investments.

In light of Mifid II rules, Morningstar recently urged asset managers to review their fund ranges semi-annually and weed out the products that are no longer relevant.

Morningstar argued that currently many asset managers are complacent in monitoring whether their funds are up to scratch, but under the new European rules investment firms will be required to check whether their funds are fit-for-purpose, remain relevant for investors and offer value.

Morningstar director of manager research services for EMEA Jackie Beard says: “These funds have still a decent size but they’ve just not really stacking up anymore against their peers.

“Some firms have ended up with a big product line up which is not really their skill. For example, Fidelity hasn’t been acquisitive though, but that doesn’t mean they can’t have a look at what they are offering.

“This is not a deliberate action against them, but it is an evolution of the market place. Companies have merged, and funds have drifted.”

Beard says many of the outdated funds in the UK Equity Income sector might have been performing well when launched in the 90s but for a 10-year period they have underperformed the category.

Beard uses the Scottish Widows UK Equity Income fund as an example, saying covering the sector hasn’t been the firm’s skill ”for a long time”.

The fund has £613m in assets and charges an ongoing fee of 1.36 per cent.

Beard says: “The fund is quite large, it has got a very high charge and that should change.

“They have now been acquired by Standard Life, but SW isn’t known for their investment expertise, the market has moved on. They try to do lots of other things, they do them very well, but investment management isn’t their core skill now.

“Everyone wants to put their money in UK equity income, but investors should realise what they are invested in.”

A Scottish Widows spokesman says: “Our role is to set a mandate for the UK equity fund that defines a fund management style and parameters that reflect the needs of our customers and the way the fund has been described to them. Stock selection is then outsourced to Aberdeen Asset Management who run the fund to Scottish Widow’s mandate and aim to achieve the performance target set. This approach uses the core skills of both parties.

“The fund has a bundled annual management charge that recovers all costs incurred in setting up, administering and managing the investment”

Testing the managers

Architas investment director Adrian Lowcock says fund groups tend to have too many funds and many of these are non-core. He agrees that this usually happens when a firm changes direction or when a manager leaves.

He says: “Some ideas don’t really get off the ground and this needs to be resolved. The question is always whose money is in the fund and how big they are. It could be money seeded in the fund by the company.”

Lowcock argues many non-core funds can have periods of underperformance but often these are funds that are used “to test out fund managers”.

He says: “Before New Star was bought by Henderson, they launched an international property fund just before the financial crisis and it struggled because of liquidity.

“But there are other ways to test a fund manager for example giving them a black box portfolio in-house and back-testing it so this is a better way to do it as it is not clients money.”

Beard says some fund houses are “trying to be all things to all people”.

Lowcock adds: “If you are a Neptune of this world, with an expertise in emerging markets, but you also have UK fund or an American fund, can you be an expert in all these areas?”

However, he says some legacy funds are also created with the intention of being core.

Lowcock says: “You need to be careful particularly about discouraging idea generation.

“M&G used to be well-known for launching funds quite in advance of a theme being popular, as well as Pictet. They can be non-core and once you build a reputation in the space you are not jumping on the bandwagon and might have a first-mover advantage.”

The UK Equity Income funds that are long-term underperformers of the category

F&C UK Equity Income
Fidelity Enhanced Income
Fidelity MoneyBuilder Dividend
FP Miton Income
Halifax UK Equity Income
HC Charteris Premium Income
HC KB Enterprise Equity Income
Henderson Global Care UK Income
HSBC Income Retail Income
Insight Equity Income Booster
Insight Equity Income
JPM UK Higher Income
M&G Dividend
Scottish Widows UK Equity Income
SLI UK Equity High Income
Threadneedle UK Monthly Income

Source: Morningstar


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Just number crunching the figures for the Scottish Widows UK Equity Income fund, cited as an example of a serial under-performer in the article: £613m x 1.36% per year = £8,336,800.

    So, to run a fund that really isn’t fit for purpose, but which has a captive audience of trusting investors (who probably don’t realise just how bad their fund is), Scottish Widows pick up over £8m per year? Is that ethical?

    At the very least, Scottish Widows should reduce their annual management charge, which would go some way to covering their under-performance. Reducing it to something less than 0.5% per year would be a start. Hang on, they’d still be earning over £3m per year!

  2. Investors in these duff old UK Equity Income funds need only consult a suitably authorised FA who, for a reasonable fee, will point out and arrange for them the changes they should make.

    Those who can’t be bothered or who aren’t prepared to pay for decent advice are of no concern to me.

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