Spot the Dog: £67bn in underperforming funds revealed

Active fund managers have had a tough time over the past few years. A small number of Big Tech stocks have dominated in terms of market performance, making it more difficult to beat the benchmark.

Against this backdrop, passive ETFs continue to be among the most popular funds with investors looking for comparable performance with lower fees.

The latest Spot the Dog report from investment firm Bestinvest found that 137 active funds, all available to UK investors, have consistently underperformed their benchmark over the past three years. This equates to more than £67 billion in assets under management.

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The number of funds that made the list in this biannual edition of the report is the same as six months ago, however Bestinvest says the level of wealth represented by these “misbehaving mutts” has jumped by 26% from £53.4 billion to £67.4 billion.

Around a third of the funds listed are global equity funds, while around a quarter are sustainable, responsible, ethical or impact funds. The runaway performance of the tech sector has created challenges for the former, while higher interest rates and energy prices have been a headache for the latter.

Is your fund in the doghouse?

To fall into the Spot the Dog list, the funds need to have underperformed over three consecutive 12-month periods – a measure of the consistency of their underperformance. They also need to have underperformed the benchmark by a margin of 5% or more when the total three-year period is looked at as a whole.

The list focuses on funds that are primarily invested in equities.

_{Source: Spot the Dog report, February 2025. Performance data as of 31 December 2024, net of fees with income reinvested.}

Every dog has its day – but sustainable funds are currently out of favour

Many investors want to build a portfolio that reflects their ethical values, and sustainable investing has been a huge focus over the past decade. Net zero targets have also created investment opportunities for investors looking to finance the transition to a greener economy.

Despite this, a large number of sustainable funds have been punished with poor performance in recent years – largely a consequence of Russia’s invasion of Ukraine in 2022. Since then, energy prices have risen dramatically, causing oil and gas stocks to outperform. Sustainable funds typically exclude these investments.

Furthermore, companies which focus on renewables are typically quite capital-intensive, meaning they can experience underperformance during parts of the economic cycle when interest rates are high. Central banks around the world raised interest rates throughout 2022 and 2023 in an attempt to tackle inflation – and rates remain elevated to this day.

“The financial markets have been unsympathetic to funds with ESG properties in recent years, in part because of soaring energy prices but also owing to negative returns from alternative energy shares both in 2023 and 2024,” said Jason Hollands, managing director at Bestinvest.

“Over the three-year period covered in our latest report, the MSCI World Energy Index delivered a total return in GBP of 71.3%, well ahead of the MSCI AC World Index total return of 28.6%,” he added.

“Compare this to the alternative and renewable energy market, which fell out of favour during the post-pandemic surge in energy demand, and the story is very different. The MSCI Global Alternative Energy Index declined by 48.8% over the same three-year period, highlighting why managers focused on green energy may have faced some challenges.”

As the underperformance of sustainable funds is largely a consequence of the current macroeconomic backdrop, it is possible they will come back into favour further down the line when interest rates are lower and energy prices fall. As the saying goes, every dog has its day. That said, Donald Trump’s election win in the US and his “drill baby, drill” mandate probably doesn’t bode too well for the sector in the shorter term.

Big Tech outperformance has left active managers chasing their tail

Although US tech stocks had a wobble in January when the launch of Chinese chatbot DeepSeek rocked markets, they have delivered sparkling performance in recent years.

Collectively, the Magnificent Seven tech stocks – Nvidia, Microsoft, Apple, Meta, Amazon, Alphabet and Tesla – account for around a third of the S&P 500 index by market weight. This is up from around a fifth at the start of 2023. In particular, stock market darling Nvidia has delivered unprecedented returns. The chipmaker’s share price has risen by around 1,800% over the past five years, at the time of writing.

This has come as great news to investors with exposure to the group – even if it does come with a hefty dose of concentration risk. Is less positive for active managers, though.

In a shareholder letter at the start of the year, star fund manager Terry Smith explained the underperformance of his flagship product (Fundsmith Equity) by pointing to this phenomenon. “Our fund owns some but not all of these stocks and it was difficult to perform even in line with the index unless you owned them at least in line with their index weighting,” he said.

It is worth pointing out that Fundsmith Equity does not feature in this edition of the Spot the Dog report – although it has appeared in the past. Of course, if investors decide that technology stocks have become overvalued and the sector crashes, active fund managers with less exposure to the sector could be vindicated.

“Given the importance of the Magnificent Seven to the global stock market, it would be unwise to ditch all exposure to these companies,” warns Laith Khalaf, head of investment analysis at AJ Bell. “But the potential for upheaval as the AI race progresses might mitigate in favour of a more thoughtful, nuanced approach to investing in them.”

The performance of the Magnificent Seven tech stocks is increasingly diverging – and companies like Tesla, Nvidia and Meta all have very different business models to one another. With this in mind, it could make sense to consider them on a case-by-case basis. This is something an active manager can do that a passive tracker fund cannot. Just make sure your manager’s views are aligned with your own.