In the doghouse: hundreds of investment funds are underperforming - is it time to sell?

The latest Spot The Dog research from Bestinvest reveals 151 funds are failing to beat their benchmark. We reveal the worst performers

Dog looking sad
(Image credit: Getty Images)

Increasing numbers of investment funds have underperformed their benchmark in recent years, even as markets rallied towards the end of 2023.

Investor portfolios have faced a volatile few years amid high energy prices and rampant inflation, rising interest rates and geopolitical tensions.

Testing times are when a decent active fund manager can come in handy as they should be able to position a portfolio to navigate choppy markets and find returns or at least limit losses.

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If anything, an active fund manager should at least be able to beat their benchmark over a few years to justify their fees, otherwise you may as well just put your money in a tracker or passive fund.

But investment platform Bestinvest’s latest Spot the Dog report has found that 151 equity investment funds holding £95.26 billion of investors’ wealth consistently underperformed their relevant market index over the past three years.

This is a 170% jump on the 56 funds featured in the previous edition in mid-2023.

These underperforming portfolios are referred to as dog funds.

What is a dog fund?

Bestinvest’s Spot the Dog report is released twice a year and is feared by fund managers as much as pups fear the vet.

It shines a light on performance, focusing on funds that have failed to beat their benchmark over three consecutive 12-month periods by 5% or more.

These poor performers earn the label of dog funds.

The investment platform insists this isn’t a “sell list” but should prompt further investigation.

The biggest dog funds

It has been a challenging time for any fund manager to beat their benchmark in recent years amid a pandemic, energy and mortgage crisis as well as geopolitical tensions.

Just 4% of the universe of equity funds analysed by Bestinvest have outperformed the MSCI World Index in all three years.

Over the past three calendar years, the best performing global industry sector was energy shares as economies opened up from the pandemic and demand for gas and electricity soared. 

Russia’s invasion of Ukraine in 2022 also pushed up energy costs and the MSCI World Energy Index delivered a total return of 125% between 2020 and 2023, well ahead of the MSCI World Index total return of 38%. 

This has contributed to an increasing number of global funds entering the doghouse, doubling from 24 in mid-2023 to 49 due to a lack of exposure to energy and an inability to keep up with and beat their benchmark.

Almost half the global funds in the list focus on sustainable investing and therefore did not benefit from the sharp rise in oil and gas-related shares or defence stocks during this period, Bestinvest said.

More recently, technology stocks have boosted financial markets, particularly the magnificent seven in the US.

During 2023, the Bloomberg Magnificent Seven Index, comprised of an equal weighting in Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla, increased by an impressive 107%..

That hasn’t helped UK-focused funds, with 34 portfolios now holding £12 billion of investors’ wealth featured, up from five previously.

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Top 10 worst performing dog funds overall
FundInvestment Association sectorThree-year under-performanceValue of £100 invested after three years
Baillie Gifford Global DiscoveryGlobal-70%£47
SVS Aubrey Global ConvictionGlobal-62%£71
AXA ACT People & Planet EquityGlobal-57%£76
AXA ACT People & Planet EquityJapan-54%£55
Aegon Sustainable EquityGlobal-53%£79
L&G Future Wld Sust. UK Eq FocusUK All Companies-52%£78
Premier Miton US Smaller CosNorth America All Companies-52%£72
SVM UK GrowthUK All Companies-51%£79
L&G Future World Sust Eur Eq FocusEurope Ex. UK-51%£73
Baillie Gifford Japanese Smllr CosJapan-49%£60

Even large funds that are popular with investors and have a strong reputation have suffered.

“These last three years have been one of the most challenging periods in living memory for fund managers to consistently beat markets, because of sharply divergent performance from different sectors as the world reopened from the pandemic, followed by a war in Europe and, more recently, excitement about artificial intelligence driving extreme market concentration in a small cluster of mega-sized companies,” says Jason Hollands, managing director of Bestinvest.

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Top 10 biggest beasts by size
FundInvestment Association sectorThree-year underperformance (%)Value of £100 invested after three years
Fundsmith EquityGlobal-14%£118
SJP Global Quality FundGlobal-23%£109
SJP International EquityGlobal-21%£112
WS Lindsell Train UK EquityUK All Companies-19%£111
Fidelity Global Special SituationsGlobal-14%£119
Fidelity AsiaAsia Pacific-13%£80
JPM Emerging MarketsGlobal Emerging Markets-16%£76
BNY Mellon Long-Term Global Eq.Global -8%£125
Janus Henderson Glbl Sustain.EqGlobal-16%£116
Ninety One Global EnvironmentGlobal-34%£99

Should you sell a dog fund?

Funds can go through bad periods for a variety of reasons such as a change in manager or style, market trends or just bad luck.

Investors should identify if poor performance is a short-term factor or long-term trend.

For example, UK funds managed by two of Britain’s most-prominent fund managers, Terry Smith’s Fundsmith Equity and Nick Train’s WS Lindsell Train UK Equity fund, made an appearance in the latest edition of Spot the Dog for the first time.

Hollands highlights that Smith has always been clear that he does not seek to trade shares on shorter term factors, chase fads nor make big macro-economic bets so it doesn’t own companies that are highly sensitive to the ups and downs of the economic cycle and has had no exposure to energy.

Hollands says Train doesn’t position for the latest market trend or near-term economic outlook but looks for companies that can generate lots of cash on a consistent basis and which have hard-to-replicate competitive advantages such as strong brands.

The fund has a strong focus on areas such as beverages, personal goods and financial services.

“Spot the Dog has been highlighting underperforming investment funds for three decades to encourage investors to keep a closer eye on their investments,” adds Hollands.

“It is not a ‘sell’ list but a prompt to check on your investments and if any have underperformed recently to understand why and consider their prospects.”

Responding to the report, Fundsmith highlighted "shortcomings" in the data.

“Our main UK competitor's global fund underperformed ours by 16% over the period chosen by Best Invest but is not rated as a "Dog" which raises an obvious shortcoming of the methodology," a Fundsmith spokesperson said in a statement. 

"We also note that Fundsmith Equity outperformed the average return delivered by funds in the IA global sector over the last three years yet many of funds with worse performance are not rated as ‘dogs’.

"As we have always said, a year is simply the time it takes for the earth to revolve around the sun. We think that investors should judge our returns over the long term, and since inception the fund is up 596% or 15.7% on an annualised basis, net of fees, compared with 11.8% for the benchmark MSCI World.”

Marc Shoffman

Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.