Many investors think that all funds are more or less the same. This, of course, could not be further from the truth. While some fund managers do aim high and succeed, some funds seem to be unlucky or to consistently target poor performance. Here we look at some of those funds, which should serve as a warning to all investors!
There are many complex ways to assess fund performance but sometimes the simple ones are the most informative. Here we look at one of the most popular sectors – UK All Companies – and simply look at the last ten 12-month periods i.e. the last 10 years. (1)
Here are some of the "best" examples (chart 1
Royal London UK FTSE4Good Tracker Trust (£148m) is beautifully consistent – bottom quintile in 8 years out of the last 10. It has underperformed the FTSE by 18% since 2008.
Some argue that ethical companies should be more profitable over the longer term - this is patent nonsense. On the other hand, the ethical label should not be an excuse for poor performance. With this fund there doesn’t seem to be a correlation between being overtly “good” or ethical and making money – we have illustrated this before (see here
). Investors may buy an “ethical” fund for very good reasons but they must understand they shackle their growth potential.
With a small number of exceptions, most of those with an ethical bent are better off buying a normal fund - that offers great performance - and then using the higher returns to directly benefit their chosen charities or causes.
Halifax Special Situations (£145m) is bottom quintile 8 out of 10 years. Depressingly, this fund has actually increased in size since we last looked, implying that someone is still buying, or, more concerningly, this is still being recommended.
Halifax UK FTSE 100 Index Tracking (£1,257m) is bottom quintile in 7 of the last 10 years. It’s a big fund but has underperformed its index by 23% since 2008. It has also underperformed the Royal London fund above.
What has always been particularly unpalatable about these Halifax funds is that they are probably sold to people largely ignorant of investment matters – they put their trust in the Halifax brand and they have been badly let down.
We’re not fans of tracker funds because we think investors can do better but the size of the underperformance of this “tracker” fund is staggering.
These funds should be closed.
So what can you do?
The fact that investors are sticking with these funds suggests that the industry needs to do a much better job of educating investors.
Investors need to vote with their money but they can only do this if they have the knowledge to understand that they can do better.
There are just two ingredients you need to escape the trap of poor performing funds:
- Process: have a method in place (such as Dynamic Fund Selection) that enables you to consistently select outstanding funds.
- Discipline: be sure you review and maintain your investment portfolio regularly (be it a SIPP, ISA, pension or investment account)
You need a clear idea of how you will maximise your returns – a process – and the discipline to apply it consistently, year after year.
ACTION FOR INVESTORS
- Please don’t get stuck in poor performing funds – take action!
- If a “tracking” fund can’t track its index then what is the point of it?
- The “ethical” label is all very well but you may be able to do more good by investing elsewhere
Chart 1: Poor performing funds vs. the FTSE 100 and the UK All Companies sector average
(1) We took all the funds greater than £50m in size that are most frequently in the bottom two quintiles (the bottom 40%) in terms of performance over each 12-month period and weighted the ranking so that those with more recent (poor) performance got a higher rating. Performance period is 10 years to 21/06/18.