Aberdeen Asset Management has been named as the top offender in Bestinvest’s latest Spot the Dog report of underperforming equity funds.
The asset management giant, which is in the process of merging with Standard Life, last dominated the laggards in January 2016.
In the latest biannual report, Aberdeen accounted for 27 per cent of the total number of funds that were named and shamed, with five funds managing a total of £2bn in assets on the list.
Aberdeen’s £1.3bn Asia Pacific Equity fund fared the worst, having lagged the MSCI AC Asia Pacific index by 7 per cent over the three years to end of June 2017, the bi-annual report says.
Aberdeen attributes the poor performance to the “Trump rally” seen in the second half of last year, in particular in emerging markets where the asset manager has always had a large presence, especially in Asia.
An Aberdeen spokesman says: “Our investment process is focused on our teams undertaking fundamental research – meeting with management and analysing the balance sheet and business model – which means there will be times when we do underperform.
“But we firmly believe that by engaging with management, undertaking rigorous due diligence and ignoring day-to-day market noise, long-term performance results.”
Funds that feature in the report have failed to beat their relevant benchmark over three consecutive 12-month periods and also by 5 per cent or more over the full three-year period. The report only analyses commission-free share classes.
One UK culprit
St. James’s Place is in second place with £1.7bn in three poorly-performing funds. The £1bn Equity Income fund, run by boutique RWC, was the biggest laggard despite levying an OCF of 1.61 per cent.
The fund has lagged the MSCI United Kingdom All Cap index by 8 per cent over three years, according to Lipper.
However, since its inception in December 2000, the fund returned 202 per cent net of fees versus 136 per cent for the FTSE All-Share Index, according to SSGA and Bloomberg data.
Bestinvest attributes the poor performance of the fund to the manager’s value investing style, which has recently been out of favour.
To protect against high valuations in the market, Nick Purves, the fund manager at RWC, has held more cash in the SJP fund in the period under review by Besinvest. Higher levels of cash acted as a drag on relative returns while markets continued to rise.
Bestinvest’s analysis argues that the performance has also been hurt by the fund’s high cost which is “anything but value investing”, it says.
The annual ongoing fee of the SJP Equity Income fund includes advice, marketing and distribution costs, according to the fund’s key information document. The fund doesn’t have a clean share class with a track record of more than a year.
This was the only UK equity fund to make the list, down from six UK equity funds at the start of 2017, marking the lowest level in the two decades the report has been published by Bestinvest.
FCA pressure or temporary blips?
No global emerging market funds were included in the report and only one Japan fund was highlighted. Only six US equity funds were earmarked as underperformers, down from nine at the start of 2017.
However 17 global equity funds were included, up from 16 in January, which Bestinvest attributes to their income-focussed mandates, which will likely have meant they were underweight the outperforming but low-yielding US equity market.
But Bestinvest says many fund groups – the same that fell under the FCA’s criticisms for competition on costs – might be showing signs of improvement.
Overall, 34 strategies made the list of underperforming retail equity funds, but this level was sharply down from 41 in the January edition.
The current level still represents £7.6bn of assets still held in consistently poor performing funds, down from £8.6 in January.
Hollands says it is “encouraging” to see less underperforming funds in the list but he warns this might be either due to a technical blip or be a sign of a new and “more meaningful” trend.
He says the move towards commission-free share classes following the RDR may have boosted performance along with consolidation in the fund space.
However, Hollands warns that the reflation trade in the second half of 2016 will have supported value strategies, adding: “the jury is therefore out on whether the industry has really cleaned up its act.”
Closet tracker troubles
Hollands warns that there are many other funds to watch out for which didn’t make it into the report.
He refers to the many “pedestrian funds” such as closet trackers, which could result better performers, but are still poor value for money.
Hollands says: “These filters are only designed to highlight the ‘worst of the worst’ and there are a great many more pedestrian funds out there including closet-trackers which largely follow the index but charge excessive fees for doing so.
“A real challenge for investors is that equity markets have delivered such strong returns in recent years, boosting the value of funds which have lagged the market, this has masked the lack of value added by some managers and will have left many investors unaware that they could be doing considerably better elsewhere.
“It is therefore vital to periodically thoroughly review your investments to make sure you are in funds that can truly justify the fees charged.”