The amount of cash held by UK savers languishing in underperforming funds has jumped to more than £45bn, according to a report by Bestinvest, which warns more turbulent markets will increase pressure on active managers to prove their worth.
The surge in equity markets following the Covid crash has led to a steady decline in the number of “dog” funds that have underperformed the broader market sector in the investment provider’s half-yearly scorecard.
But that trend reversed in the most recent report, with the number of long-term underperforming funds falling from 77 last summer to 86 by the end of 2021, when markets began to falter, while the amount of cash in lag funds increased by 54. percent.
Since then, markets have suffered a sharp sell-off, which has already affected some well-known stockpickers, and which could spell trouble for active managers who enjoyed relatively clear sailing during a benign period of rising markets.
“Rising markets lifted all ships,” said Jason Hollands, chief executive of Bestinvest. “If we enter more difficult times for the markets, the difference between the best managers and the worst could actually mean the difference between actual gains and losses.”
“In recent years, it has been more difficult for investors to identify weak funds, with low interest rates and central bank money-printing programs pushing stock prices higher. Most funds investing in equities have generated gains regardless of the skill of their managers,” he added.
The merits of investing in actively managed funds have come under scrutiny in recent years, given the growing popularity of low-cost passive investment options, which simply track market performance. Stockpickers who aim to deliver higher returns have faced more calls to defend their case and higher fees.
Investment firms such as Vanguard, which have tried to lure investors into their passive strategies, say these low-cost options are a better bet for most people. “Consistently outperforming the market, over the long term, is very difficult,” said Jan-Carl Plagge, head of asset-liability portfolio research for Vanguard in Europe.
Plagge said investors choosing active managers should be careful not to change their selections too quickly, citing research that shows that of funds that have outperformed over 10 years, nine out of 10 have had at least one three. years of overdue returns.
Bestinvest’s report, which looks at 897 UK-based mutual funds worth a combined £660bn, names funds ‘dogs’ which have performed worse than the broader market in which they invest in each of the past three years, and have underperformed by at least 5% during that period.
Several large fund managers have billions of dollars of their clients’ money in these underperforming funds. A number of Schroders-managed Halifax and Scottish Widows branded funds have a combined £8.6bn worth of signage strategies, while the UK’s largest wealth manager, St James’s Place, has £5.7bn in funds on the list.
“£45bn is a lot of savings that could work harder for investors rather than rewarding fund companies with hefty fees,” Hollands said.
Lloyds Banking Group, owner of the Halifax and Scottish Widows brands, said the funds should not be judged on recent performance alone. “We believe the long-term outlook means this style of investing is still appropriate for our clients’ investments,” he said. Schroders said he regularly reviews fund performance to see if “any action is needed to improve outcomes for our investors.”
St James’s Place said it had taken steps to improve the performance of a number of funds and its average client had seen strong returns over the past decade investing in a mix of funds.
At the end of 2021, the largest source of “dog” funds was mandates away from U.S. tech stocks, which rose through most of 2021. balancing exposure to the US with other regions, have often lagged benchmarks heavily influenced by rising US tech stocks.
However, markets started 2022 in a different mood, with US tech stocks falling around 10%. “Six months from now, if the current market shifts happen, you might see a little changing of the guard,” Hollands said.