By 
There is £44bn of investor cash sitting in lacklustre funds that consistently rank below their peers, a new report finds.
The report claims 92pc of funds fail to achieve acceptable levels of performance over the long term and identifies 66 it says you must not own – so-called “dud funds”.
The report was compiled by analysts Fund Expert. It defines a dud fund as one that has made it into the top 40pc of funds within its sector less than a fifth of the time over the past 10 years, excluding funds with less than £50m in assets under management.
The report says: “Remember, these are not just the bottom 20pc of funds. You must understand what this means in plain English. These are the funds that are constantly dragging along the bottom of their sector… this is a checklist of funds you must not own.”
The worst performer according to the report was the £102m Investec Target Return Bond fund, which ranked among the top 40pc of funds in the absolute return fund sector just 1.5pc of the time over the past decade.
Absolute return funds aim to make consistent returns throughout various market conditions by using complex “options” investments to minimise losses and take advantage of price movements, although some are better at achieving their goals than others.
Some of the worst dud funds within the British income sector were the £55.8m HC Kleinwort Hambros Equity Income and the £173m HSBC Income funds, which made the cut among the top 40pc of funds a mere 2.3pc and 5pc of the time respectively over the last 10 years.
Royal Bank of Scotland Extra Income, a £76m corporate bond fund, was also listed among the lowest ranking duds – only performing in the top of the sector 4.8pc of the time over the same period.
The report claims the best funds can be identified based on similar measures – funds that have made it into the sector’s top 40pc around two thirds of the time or more over the past decade. However, it said the vast majority fail to reach this benchmark and experts have said past performance is no guarantee of future success.
Ryan Hughes of AJ Bell, a broker, said there were hundreds more funds available to buy than there needed to be. “This presents investors with a bewildering choice and sadly all to often many investments turn out to be a disappointment,” he said.
So how exactly do you go about deciding where to invest?
Moira O’Neil of Interactive Investor, another broker, said instead of gambling on whether a fund might perform well or not in the future, investors could buy a passive tracker fund.
Unlike active funds, where managers try to beat the market with specific stock selections, passive funds invest in each company of a certain index, like the FTSE 100 for example, so they have less stock-specific risk when the market is not performing well.
“You won’t get the dizzying outperformance, but nor will you get the stomach churning underperformance,” she said, adding that high fund charges can eat into overall returns over time. Actively-managed funds are more expensive than passives and can charge more than 1pc in some cases, while trackers allow access to stock markets at next to nothing.
She said the very best active funds would make up for their charges with superior returns in the long run, but warned of “closet trackers” – funds that charge active fees but only narrowly outperform their sector or benchmark. “If you can get similar performance for a fraction of the cost, it makes sense to go passive,” she said.
Jason Hollands of Tilney, a wealth adviser, said investors should look at the performance of individual stock-picking managers, rather than the funds themselves, to determine who is the best person to grow their money.
“What we look for in a manager is someone with a clear investment process, who is not constrained by having to invest in a particular sector or industry and who invests for the long term,” he said.
He said Terry Smith of Fundsmith, Nick Train of Lindsell Train, Anthony Cross and Julian Fosh at Liontrust and Hugh Yarrow at Evenlode were all money managers that met his criteria.
Mr Hughes added: “Review your choices at least once a year to ensure you have haven’t inadvertently ended up with a poor-quality investment.”
For the best of the Telegraph’s investment analysis, advice and expert opinion, plus columns from our stock-picker Questor, sign up to our weekly newsletter.
Comments