February 24, 2012 7:23 pm

Volatility reprieves ‘dog’ funds

Last year’s stock-market volatility enabled more than 100 serially underperforming funds to avoid a third consecutive year of below-average returns, a new report has revealed. But sales figures show that private investors are continuing to abandon actively managed funds in favour of passive index trackers.

In its latest analysis of so-called “dog” funds, published this week, broker Bestinvest found 44 that had underperformed their benchmark indices in each of the three years to the end of 2011, and by at least 10 per cent overall. In Bestinvest’s previous study, six months ago, 94 had met this definition of a dog fund. As a result, the amount of money consigned to three-year underperformers has fallen dramatically: from £23.16bn to £9.24bn.

Over the period 2009-2011, not a single fund in the North America and Global Emerging Markets sectors was classified as a dog, while the number of dog funds in the Europe and Global sectors fell to just three and ten respectively, from 10 and 27 in the earlier report.

However, Bestinvest concludes that this improvement cannot be attributed to better stock picking by fund managers – instead, it is “largely down to volatility in the markets”, which “created opportunities for managers to outperform for short periods”.

It found that a further 108 funds have underperformed their benchmark indices by more than 10 per cent since 2009, but managed to beat these benchmarks as indices fell sharply in the second half of last year.

Adrian Lowcock, senior investment manager at Bestinvest, also points out that the performance figures are flattered by the exclusion of the last six months of 2008, “when financial markets froze”.

According to the report, the fund management companies with the largest sums in dog funds are: Scottish Widows, with £2.28bn across four funds; M&G, with £1.19bn in its underperforming Dividend fund; Schroders with £1.17bn in its UK Mid 250 fund; Standard Life, with £730m in its UK Equity High Income fund; and St James’s Place, with £477m in its International fund.

Earlier this month, Standard Life’s fund was also placed on Principal Investment Management’s “black list” of consistent underperformers in the UK Equity Income sector, following a “rapid descent”.

Bestinvest estimates that investors in these and other dog funds have paid £133m in annual charges over the past 12 months. Over the three-year period of underperformance, the total charges for these funds approached £400m.

Advice firm Addidi Wealth argues that many actively managed funds have returned less than the much-criticised with-profits funds run by life insurance companies. It says: “With profits funds have been put in the ‘bad’ investment category for almost 10 years… people seem to forget that a lot of managed funds have not delivered value for clients either.”

But private investors appear to be turning to index-tracker funds as an alternative. Sales figures released by the Investment Management Association show that net retail sales of index trackers reached a new high of £1.9bn in 2011. In aggregate, UK investors now hold £39bn, or 6.8 per cent of all their fund assets, in these passively managed funds – the highest level on record.

Passively managed exchange traded funds (ETFs) are also attracting higher inflows. iShares, the ETF brand of BlackRock, says assets held in its funds via platforms grew by more than a third in 2011 and are up 175 per cent since the first quarter of 2010.

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