For investors, wading through the vast investment universe to root out golden nugget opportunities is only half the battle – dodging serial underperformers is just as important.
Investment analytics firm FundExpert defines ‘dud’ funds as those that only manage to get into the top 40 per cent of performers in its own sector for 20 per cent of the time.
Its new list of ‘dud’ funds identifies Investec Target Return Bond fund as the worst performer, ahead of HC Kleinwort Hambros Equity Income and Royal Bank of Scot Extra Income in second and third positions respectively.
FundExpert’s research identifies funds that are consistently dragging along the bottom of their sector
The ‘time’ is the 120 overlapping 6-monthly periods in the last 10 years – with a higher weighting being given to more recent periods.
For example, a fund with a score of 14.2 per cent has only been in the top 40 per cent of performers 14.2 per cent of the time in the last 10 years.
These are not just the bottom 20 per cent of funds but those that are consistently dragging along the bottom of their sector.
The analysis identifies 66 funds available to UK investors that – if you think the FundExpert research is solid – you should probably avoid. They are listed in full below.
|Fund||Score (%)||Fund||Score (%)||Fund||Score (%)|
|Investec Target Return Bond in GB||1.5||Insight Absolute Insight in GB||14.0||Baring Targeted Return TR in GB||17.7|
|HC Kleinwort Hambros Equity Income in GB||2.3||Halifax Far Eastern in GB||14.2||Halifax UK Growth C TR in GB||17.8|
|Royal Bank of Scot Extra Income TR in GB||4.8||Scottish Widows Pacific Growth in GB||14.2||Jupiter Merlin Worldwide Portfolio TR in GB||17.9|
|HSBC Income in GB||5.0||Scottish Widows Japan Growth in GB||14.4||SJP Sustainable & Responsible Equity in GB**||18.2|
|Scottish Widows High Income Bond in GB||6.9||PUTM UK Equity Acc in GB||14.5||S&W Eagle in GB||18.3|
|Janus Henderson Inst North American Index Opportunities in GB||8.2||HSBC UK Growth & Income C Acc in GB||14.6||Kennox Asset Management Ltd Kennox Strategic Value TR in GB**||18.3|
|Scottish Widows UK Growth A Acc in GB||9.2||Halifax UK FTSE All Share Index Tracker C in GB||14.8||Fidelity Moneybuilder Income TR in GB||18.5|
|S&W Taber Investment TR in GB||9.2||L&G (A&L) Capital Growth in GB||15.3||SJP Alternative Assets L Acc in GB||18.6|
|MI Charles Stanley UK & International Growth in GB||10.0||TM UBS (UK) UK Income Focus in GB||15.5||Dimensional Global Short Dated Bond in GB||18.6|
|Janus Henderson UK & Irish Smaller Companies I Acc TR in GB||10.5||Scottish Widows Dynamic Income A Acc in GB||15.6||Architas MM UK Equity A Acc in GB||18.8|
|Majedie UK Smaller Companies A Acc in GB||10.8||Thesis KES Growth TR in GB||15.8||Stan Life Wealth Falcon in GB||18.9|
|Scottish Widows American Growth in GB||10.8||Marks & Spencer UK Select Portfolio Acc in GB||16.1||BMO Global Total Return Bond (GBP Hedged) TR in GB||19|
|Santander UK Equities A in GB||11.3||Family Asset in GB||16.2||Scottish Widows European Growth A Acc in GB||19|
|Scottish Widows Stockmarket Growth Portfolio in GB||11.8||Janus Henderson Inst UK Equity Tracker Trust TR in GB||16.5||IFSL Tilney Bestinvest Defensive Portfolio Clean Acc in GB||19.1|
|Royal London UK FTSE4Good Tracker Trust Acc in GB||12.4||Scottish Widows Opportunities Portfolio in GB||16.5||Halifax Japanese in GB||19.1%|
|Scottish Widows Emerging Markets in GB||12.6||TM Stonehage Flemming Global Equities I TR in GB||16.7||Quilter Investors Ethical Equity in GB**||19.2|
|Scottish Widows Asset Allocator A Acc in GB||12.8||Halifax UK FTSE 100 Index Tracking C in GB||17.0||Aberdeen North American Equity in GB||19.2|
|Fidelity Wealthbuilder in GB||13.2||Fidelity Diversified Growth Inst in GB||17.2||Schroder Core UK Equity Z Acc in GB||19.4|
|Sarasin Global Higher Dividend in GB||13.4||Standard Life TM UK Equity General Acc in GB||17.2||LF New Institutional World TR in GB**||19.4%|
|Halifax Corporate Bond in GB||13.5||Santander Max 70% Shares Unit Trust in GB||17.5||Aviva Inv Corporate Bond TR in GB**||19.4|
|LF Bentley Sterling Balanced in GB||13.8||S&W Magnum TR in GB||17.6||Fidelity Strategic Bond TR in GB||19.6|
|Margetts International Strategy in GB||13.8||Family Charities Ethical Inc TR in GB||17.6||Thesis Headway A Acc in GB||19.6|
The study awards a fund that ranks among the top 40 per performers in its own sector in 60 per cent of the time ‘vintage’ status
It found that 92 per cent of funds failed to reach the threshold.
The bottom three funds
At the head of the table – or the foot, depending on which way you look at it – is the Investec Target Return Bond fund which has only been in the top 40 per cent of performers 1.5 per cent of the time in the past 10 years, according to the research.
It targets a return of overnight GBP LIBOR plus 2.5 per cent (gross of fees) per annum over rolling three year periods regardless of market conditions by investing primarily in interest bearing assets and related derivatives.
According to data from FE Analytics, the fund, which levies ongoing charges of 0.84 per cent, has returned -6.03 per cent over the past five years to 16 April 2019 – far below the sector average of 8.85 per cent.
How the fund ratings work
FundExpert exclude funds that are less than £50million in size from the unit trust/open ended investment companies universe but don’t actively exclude funds based on their age.
The nature of Vintage Fund Ratings is that funds need to have been around for a few years to build up a track record before they can get a Vintage rating.
HC Kleinwort Hambros Equity Income received a 2.3 per cent rating – the second worst score in the study.
The fund, which aims to generate above average and increasing income return coupled with growth of capital over the longer term through investment predominately in shares, is notable for its high ongoing charge of 2.47 per cent.
Yet it returned less than the average fund in its sector over the past five years (23.44 per cent versus 34.4 per cent).
The third worst fund on the list is Royal Bank of Scot Extra Income, with a score 4.8 per cent.
The fund, which has an ongoing charge of 1.05 per cent, predominately invests in UK and European fixed income securities to provide a high and stable level of income, returned 18.58 per cent – less than the sector average of 23.34 per cent.
How to replenish a portfolio full of duds
FundExpert say that some tens of billions of investors’ cash is tied up in the 66 listed dud funds.
We asked Sam Lees, head of research at FundExpert to offer guidance on how to disinvest from serial underperformers.
Here’s what he said.
If you are an investor with a portfolio full of duds then the best way to get started is to sell. There’s no point in holding them.
Starting from scratch, a successful method for choosing funds must have these criteria:
- Straightforward to identify top rated funds
- Underlying process must be clear and understandable
- Process must be repeatable
- Long term evidence of extra growth being achieved
We back tested various methods for selecting funds back to 1994. The method which stood head and shoulders above alternatives was what we now call Dynamic Fund Ratings.
The Dynamic Fund Ratings met all of our criteria for an effective rating system:
- The funds to buy are given five stars.
- The five-star funds are the top 20 per cent of funds over the prior six months.
- It is easy to repeat this process every six months.
- The evidence for achieving extra performance is superb.
It works like this, assuming you apply it to the popular UK All Company sector which we used in the example above:
- Buy the top-rated fund using Dynamic Fund Ratings.
- Sell this six months later.
- And then buy the top-rated funds of the most recent six months.
- Repeat this every six months.
Straightforward. Proven. Efficient.
We tested the effectiveness of Dynamic Fund Ratings within the UK All Companies sector, analysing 216 five year periods from 1994 to 2017. The results:
- 7.83 per cent extra growth per annum – achieved by the Dynamic Fund Ratings vs the average sector fund.
- £4,577 average extra return after five years – from an £10,000 initial investment.
- 92.59 per cent chance of outperformance – Dynamic Fund Ratings outperformed in 200/216 five year periods.
The lesson for investors?
Investor inertia or complacency or ignorance or gullibility, call it what you will, is very expensive.
But the best investors in the world all have a clear process.