Funds: The booming 'dog' population

You'd think, in a recession, that fund managers would be busy stepping up their game. But the latest report on Dog Funds' from wealth manager Bestinvest reveals the opposite. Bestinvest labels 133 funds dogs', up from 44 in the spring edition that's £26bn of investors' money languishing in terrible funds. "The number of dogs has risen to a very worrying level," says Adrian Lowcock, an adviser at Bestinvest.

To be fair to fund managers, anyone can underperform for a short while and that shouldn't matter if long-term performance compensates. However, that's just the problem, according to Bestinvest it doesn't. The group measures each fund's performance for three years against its benchmark. If over that period a fund has underperformed by 10% or more, then they class it as a dog'.

Leading the pack is fund manager Scottish Widows, which has ten dog funds. Other big names also feature, including Schroders, Fidelity, M&G and BlackRock. This is more than a little worrying, as these are some of the biggest fund managers on the planet. So how can you track down a good fund?

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The main factor to watch is costs. If you invest, say, £10,000 over 20 years at an (optimistic) expected annual return of 7% with an annual management fee of 2.5%, you will end up around 20% worse off than someone who only pays 1.5% per year in fees. One way to keep costs down is to invest in trackers or exchange-traded funds that follow indices, rather than active funds that try to beat them.

If you'd rather pay for active investing (which can be worth doing if you find a fund manager you have faith in, or are looking at a particularly specialised market) then investment trusts often offer a better deal than unit trusts. However, due to the government's Retail Distribution Review a reform of industry fee structures that comes into force in 2013 unit trusts are starting to drop their costs.

Even so, watch out for extras. Ryanair-style pricing', where fund managers add on hidden extras such as advisory fees or trading costs, can still be a problem. Ask about performance fees too, says Mark Dampier on Fund Web. Sometimes if a fund drops and then recovers you start paying a performance fee on the recovery, even though the long-term performance may be weak.

The bottom line is that you can't control how your fund manager performs, but you can at least decide what you want to pay him.