“Dog” funds are the product of their owners
The FT reported this week on Bestinvest’s latest “Spot the Dog” report, revealing the poorest performers across actively-managed portfolios over the last three years. According to the report, a lot of well-known faces have made the list, including 4 funds from St. James’s Place, 7 funds from Jupiter and 8 funds from Janus Henderson. Meanwhile, robo-advisors and digital wealth management companies pour over the numbers in disbelief at the sheer quantity of investor money that was lost in actively-managed portfolios.
111 “dog” funds were identified, quadruple the number of under-performing funds from the previous report. Total assets managed by “dog” funds equalled £54.6bn, the highest level ever recorded by the report. This sort of information should bother investors looking for smarter ways to grow their money, rather than being accepted as part and parcel of the investing game.
The astonishing numbers speak for themselves, however, Bestinvest encourages investors not to look to sell their stakes “automatically”, despite much of the performance resting entirely upon individual fund manager’s long-term hunches and analysis.
Bestinvest offered some explanations for the performances. Whether active or passive, not much can be done to completely avoid bearish market ramifications. However, the actions available to managers, like regular portfolio checks are a different story. The report goes on;
“When funds are performing well, their managers are shown off like rock stars of the City. And yet some of these stars spectacularly crash out of orbit, while others simply fail to beat their benchmarks over the long term...surprisingly, many investors continue to put up with bad or pedestrian performance. This could be because they fail to check their investments regularly, they don’t receive any ongoing information from the adviser who originally recommended the investment, or they simply aren’t interested.”
Neil Woodford was one of those “rockstars” not long ago. Now, his fund, “LF Woodford Equity Income C” came second worst in the report, with -28% returns. St. James’ Place is another example. Using managers from BlackRock and Woodford Investment Management, offering clients the “access to fund managers of outstanding ability.” Well, over 3 years SJP managed to have 4 of their funds on the list, double their total last time, 3 of which sit in the bottom 20. Of those, the worst performing fund came in at a -30% underperformance. -30%! And what’s more;
“These (SJP) funds also have some of the highest ongoing costs of those featured in Spot the Dog.”
While Woodford’s website claims the funds are run by “an outstanding fund manager for more than 25 years who has consistently delivered outstanding long-term performance to investors”, it just goes to show the patterns of huge returns and losses that active funds are continuing to operate within can affect even the managers with the best reputations.
SJP isn’t an outlier either, 13 of the 20 worst had -10% returns or worse, and 3 had -28% or worse. Jason Hollands, MD of Tilney, commented on the report;
"These differences in fortunes cannot be explained by variations in fees but come down to the decisions taken by the managers as to which companies to invest in. It is therefore vital for investors to choose their funds very carefully.”
As a Wealthtech, Exo’s service provides daily risk management, decreasing the likelihood of large losses happening. Wealth management is one of the remaining financial services yet to make a decisive step into technological alternatives, despite the management of risk being a consistently unpredictable field of finance; how can a fund present itself as a potentially solid performer in the long-term, when its performances are -15% over 3 years, despite bullish markets during that time?
The summary of the hunches that didn’t come to fruition began with this;
“A common strategy for beating the index is to look for good small and mid-cap companies which offer greater growth potential...but these companies have underperformed...as a result of the continued uncertainty and liquidity issues. In contrast, the large multinationals that dominate the top end of the FTSE 100 have performed relatively well.”
These specifics shouldn’t matter, particularly when investments have to be diligently and consistently managed. Some quantitative wealth managers, like here at Exo Investing, optimise their portfolios daily. Similarly, the diligence required from DIY investors to manage their investments is an enormous challenge.
It seems reasonable to assume more investors would prefer not to rely on funds that are exposing them to unnecessary risks, or making very high losses. You have to wonder how many more billions could be squandered in actively-managed funds until then. We can do better than that, and so can our money.