Funds to sell: the failing investments to remove from your portfolio now

If you hold a number of funds in your portfolio, you may have noticed that several of them are not doing so well under inflationary pressures, rising interest rates and from market turbulence caused by the war in Ukraine.

But which funds are officially in the ‘doghouse’ and is it time to ditch them?

According to BestInvest’s latest twice-yearly Spot the Dog report, 44 funds are now in the ‘dog house’, with investors holding over £19.1bn in underperforming ‘dog funds’ - nearly double the £10.7bn online investment platform BestInvest recorded in its previous Spot the Dog report back in August.

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BestInvest’s report looks at funds that consistently underperformed relative to their relevant market index. And while funds are not put into the dog house just because markets are going through a rough patch, “it highlights the misbehaving mutts whose poor performance is more deep-seated than a short-term wobble”, the report stated.

For a fund to qualify as a dog, it must have failed to beat the benchmark over three consecutive 12-month periods by 5% or more over the entire three year period.

UK equity sectors were home to the largest share of underperforming funds despite the strong performance by the UK’s big blue-chip companies last year.

It identified 44 equity funds investors might be better off turning away from, including “several former high-flyers and once popular funds that have subsequently fallen on hard times,” says Jason Hollands, managing director of Bestinvest.

“The difference between the best and worst performing funds cannot be explained by fees alone and ultimately comes down to the decisions taken,” Hollands said. “This underlines the need for investors to be super selective when choosing actively managed funds.”

Do you hold a dog fund? Here are the underperforming funds you may want to sell now.

Top underperforming funds

BestInvest looks at UK domiciled open-ended investment companies and unit trusts investing mainly in equities that have share classes open to retail investors. It ranks their performance by comparing them to a benchmark index representing the market the fund operates in.

The Global sector was the second weakest spot, with assets in its top underperforming funds increasing from £873m to £4.49bn.

These are the top ten worst performing funds overall:

Source: Spot the Dog, February 2023

Underperforming UK funds

“The UK’s precarious domestic situation – turbulent politics last year, high inflation, an increased tax burden and a dismal growth outlook – has hurt the small and midcap sectors, which are generally more reliant on the fortunes of the UK rather than the global economy,” the report said.

Funds in the UK equities sector were the worst performing. Assets in dog funds rose to £8.4bn from £5.5bn for the UK All Companies sector, and to £3.1bn from £2.1bn for the UK Equity income sector. “This is perhaps surprising, given that it was a much better year for highly international, large blue-chip companies found in the FTSE 100 Index,” the report said.

But beyond big companies, small and mid-cap companies struggled, especially those with greater exposure to the UK economy.

In the UK All Companies category, where funds are compared to the MSCI United Kingdom All Cap benchmark, Unicorn Outstanding British Companies was top of the list, underperforming its benchmark by 23%. Halifax Special Situations and Invesco UK Equity High Income were second and third, underperforming by 23% and 17% respectively.

Unicorn UK Ethical Income, Unicorn UK Income, and LF abrdn Income Focus topped the UK Equity Income funds category, which also stand against the MSCI United Kingdom All Cap.

Underperforming fund groups

The main underperforming fund groups were Schroders, St James’s Place, Hargreaves Lansdown, Invesco, and Fidelity.

Only three of Schroders’ own brand funds made the list – UK Multi-Cap Income, European Sustainable Equity, and European Alpha Plus, falling 16%, 27% and 22% behind their benchmarks.

But funds under the Scottish Widows and HBOS brands featured persistently. Funds managed by Schroders account for £7.5bn in underperforming assets.

St James’s Place £2.2bn St James’s Place International Equity fund featured on the list, underperforming its benchmark by 25%, as did Hargreaves Lansdown’s £1.8bn Multi-Manager Special Situations trust, which underperformed by 22%.

Invesco’s UK Equity High Income and Responsible Japanese Equity Value Discovery both made the list and hold £2.956 bn between them, both underperforming by 17%.

Fidelity’s South East Asia Fund made a “rare appearance”, but Fidelity American made the list again, falling 27% behind its benchmark over three years.

Should you ditch underperforming funds?

Past performance should not be an indicator of future returns, and everyone might have individual reasons as to why they choose to stick with certain funds such as investment styles or sectors.

Other funds might be working on their underperformance and communicating with their investors. So BestInvest stresses this isn’t a sell list – but it might be worth looking into funds that make repeat appearances.