AN ASTONISHING £13bn is languishing in so-called dog funds, which persistently fail to deliver returns for investors, according to BestInvest’s biannual Spot the Dog report published earlier this week. Spot the Dog branded Jupiter as the worst performing investment house in terms of the value of assets in dog funds. Also among the main culprits were Scottish Widows/SWIP, Schroders, Gartmore and Henderson (see table). Between them, these five firms account for over half of the £13.29bn invested in dog funds.
Dog funds are those that have underperformed their chosen benchmark in each of the past three years by at least 10 per cent. This eliminates those funds that have suffered temporarily from market conditions and index trackers, which will always undershoot due to charges.
Adrian Lowcock, senior investment adviser at BestInvest, says: “With the age of austerity cutting ever deeper into our personal finances and threatening to reduce personal wealth in the next few years it has never been more important to make sure we get the best from our savings and investments.”
He adds: “Investors simply cannot afford to leave their hard earned money languishing in dog funds and hopefully our report serves as a wake up call for people to review their portfolios and ensure their money is working harder for them.”
So what should you be looking for in a fund manager? How can you avoid investing your money in a dog fund? Carl Howard, head of direct investment at Barclays Bank, says that you need to be clear about why you are investing, your time horizon and your appetite for risk when it comes to selecting the right funds for you. “Be clear what your investment objectives are. We would encourage customers to view investments as having a five-year-plus horizon. You also need to think about your appetite for risk – how would you feel if the value of your investment fund were to fall and how much volatility would you be comfortable with?”
Mick Gilligan, partner and head of research at stockbrokers Killik & Co, recommends looking at the past performance of the fund and the fund manager. By looking at historical data, you can get an idea of the risk taken to generate the returns as well as whether the fund manager has exhibited skill or not.
However, he adds that while historic data is important, it is just as important to take a view on the future and assess how a manager is positioned. “It’s important to look beyond past performance and get a view of how the manager sees the world. If it agrees with your own view then that should be an encouragement to put your money into the fund,” he says.
Barclays’ Howard says that fund ratings firms can also be quite a helpful indicator: “There are two main types: qualitative, which look at the approach the fund manager is taking, and quantitative which analyse performance.”
He adds: “You could also look at how the fund is performing against its benchmark. While past performance can’t tell you how that individual fund will perform in the future, it should give you a sense of how that fund is managed.”
In Gilligan’s view, unexpected performance – good or bad – should be a reason to reassess: “For example, [Invesco’s] Neil Woodford had a bad year last year but we probably would have been more concerned if he had had a good year because it wasn’t his type of market.” He also warns against selling out of funds that have performed poorly because of market conditions.
You’ll never get your investments perfect. But some research into past performance, the manager and the fund’s investment objective means you’ll avoid buying into the worst of the dogs.