Evelyn Partners has just released its biannual Spot The Dog survey of UK-listed actively managed investment funds available to retail investors which identifies not just the winners but the losers, with the aim of pushing fund groups into taking action.

The report focuses on funds which warrant ‘special attention’ because they have performed particularly badly compared with their benchmark over the last three years, but it excludes investment trusts as their share prices may not reflect the NAV (net asset value) or underlying performance of the managers due to discounts and premiums.

We should also stress this research isn’t a list of funds to sell, it is simply a statistical snapshot of fund performance over a given period, and investors are encouraged to do their own due diligence before reaching any conclusions.

TOUGH TIME FOR GLOBAL MANAGERS

As the report puts it, markets have been particularly ‘capricious’ over the last three years with leadership – and index performance – dominated by a handful of well-known tech companies which has made it hard for active managers to outperform.

As a result, only 4% of global equity funds have managed to outperform the MSCI World index over the three years to the end of 2023.

In total, the number of funds ‘in the doghouse’ has almost tripled from 56 in July to 151 in December with a combined asset value of £95.3 billion against £46.2 billion six months earlier.

The highest number of ‘dogs’ is in the global sector, with 49 names against 24 funds in mid-2023, of which half are focused on sustainable investing and therefore had no exposure to energy stocks which rocketed in 2021 and 2022, first due to the post-pandemic rebound which sent fuel prices soaring and then due to the invasion of Ukraine.

A key area of underperformance was in funds with a ‘quality’ bias, as they tend to invest in companies with strong balance sheets, resilient cash flows and robust business models.

In theory, these are exactly the sort of stocks which should have performed well in a period when global interest rates rose at their fastest-ever pace and quality companies with pricing power were able to benefit at the expense of weaker competitors.

However, as the report highlights, coupled with the strength of energy stocks, ‘over the period of this report markets have swung violently between favouring highly economically sensitive-companies and those benefiting from AI-excitement’ instead.

The report also points out 2021 to 2023 was an especially tough time for investors in renewable energy with the MSCI Global Alternative Energy index down three years in a row.

EQUALLY TOUGH FOR UK EXPERTS

There was a rise in the number UK-only funds which underperformed, and a significant rise in the assets under management to £12 billion or three- and-a-half times the previous count.

Part of the reason for this is the number of ‘ethical’ and ‘sustainable’ funds, which like their global counterparts have to steer clear of energy stocks, except in the case of the UK the energy sector has a much bigger weighting than it does in the global index, so the underperformance is even more marked.

The authors of ‘Spot the Dog’ acknowledge that funds can go through weaker periods for a variety of reasons: poor decision-making, a run of bad luck, instability in the team or ‘because the fund has a style or process that may be temporarily out of fashion with recent market trends’, which could explain the surge in numbers over the last six months.

‘Identifying whether these are short-term factors that will eventually pass, or more problematic, is key and investors should ask several questions before they take any action’, stress the authors.

Valuations in the UK are widely accepted to be cheap versus other regions but that didn’t help overall performance last year despite a pick-up in the final two months.

Of the 191 UK-focused funds in the report’s universe, 34 or 18% qualified as dogs, ranging across the spectrum in terms of style, from growth to recovery to income.

Big companies with international exposure and overseas earnings generally fared better than smaller, domestically-oriented mid- and small-caps where sentiment remained – and remains – poor.

Looking on the bright side, the report suggests the UK’s cheap valuations, high dividends and the fact many companies are now buying back their shares ‘could encourage investors back into the market’.

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