Investors naturally put a lot of effort into identifying winning investments to stay ahead of the game, but less appreciated is the idea of steering clear of laggards.

For fund investors this is where the Evelyn Partners Investment Management Spot the Dog biannual report comes in.

The report’s aim is to compare fund performance on an apples-to-apples basis against an appropriate benchmark to identify serial underperformers across different regions and investment styles.

Performance is measured over three years, which should be sufficient time to remove the role of chance.

Funds in the doghouse must have underperformed for three consecutive 12-month periods, and by 5% or more over the entire period.

It is worth noting the analysis only looks at open-ended funds which are available to UK retail investors. Funds are compared against an appropriate market benchmark rather than the average performance in a sector.

It is also worth reminding readers past performance is just one factor among several qualitative and quantitative factors which should be considered when making an investment decision.

WE’RE GOING TO NEED A BIGGER KENNEL

There are 137 funds which have earned their place in the doghouse, with a combined £67.4 billion of assets up 26% from the last report.

Funds badged ESG (environmental, social and governance) continue to be highly represented, comprising a quarter of the total litter. The dogs are getting bigger, too, with 15 funds topping £1 billion of AUM (assets under management), up 50% from 10 funds last time.

It is noteworthy that some prominent names which have historically done well for investors have qualified for the list, including the flagship Liontrust (LIO) Special Situations Fund (FUND:B57H4F1) and Lindsell Train UK Equity (FUND:B18B9X7), which makes its second appearance.

Liontrust has seen more of its funds enter the doghouse this time around, including the  Sustainable Future Global Growth Fund (FUND:3003006) and the Liontrust Sustainable Future European Growth Fund (FUND:3002939).

Wealth advisor St. James’s Place (SJP), which selects external managers to manage its funds, has two of the biggest funds in the doghouse worth a combined £14 billion.

The global quality fund with £9.4 billion of AUM makes its second consecutive appearance, while the £5.27 billion sustainable and responsible fund also makes the ‘dogs’ list.

Fidelity International’s Global Special Situations fund (FUND:B8HT715) with £3.3 billion of AUM is the third largest mutt to enter the kennel.

RUNTS OF THE LITTER

The largest number of serial laggards can be found in the global equity sector which contains 44 funds managing a combined £35.2 billion of assets, up in value by a third over the last six months.

Notably all the funds underperformed the benchmark by more than a tenth with the worst, the inaptly named Artemis Positive Future (FUND:BMVH597), underperforming the MSCI World index by 63%.

It was closely followed by Baillie Gifford Global Discovery (FUND:0605933) which has lagged the MSCI World Small Cap index by 56% over the last three years.

In terms of percentage rather than absolute numbers, almost a third of funds in the UK smaller companies’ sector have entered the doghouse, a big contrast to a few years ago, when the breed barely made an appearance.

Smaller companies, especially those trading on AIM, have had a tough time attracting investors in recent years and have not been helped by the reduction in inheritance tax breaks announced in the Autumn budget.

Moving in the other direction is the UK all-companies sector which has seen the number of hounds drop by a third to 30 funds in the latest report. The list is dominated by funds which have historically had a larger allocation to the medium and smaller end of the UK market.

The last few years have seen large-cap, blue-chip companies with exposure to overseas earnings perform better than their smaller brethren.

Lastly, the top prize for magnitude of underperformance goes to the Japan sector where the median fund lagged by 25% over the last three years.

The Baillie Gifford Japanese Smaller Companies fund (FUND:0601492) took podium position, underperforming the MSCI Japan Small Cap index by 49%.

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