The UK remains the home of the largest share of so-called ‘dog funds’.
Dog funds designate consistently poor performing investment funds and are listed twice a year in Bestinvest’s Spot the Dog reports.
The previous edition of Spot the Dog found that UK funds were responsible for more than 70% of the £10.8bn total of assets managed by so-called ‘dog funds’.
In the latest report published today (10 February), the UK and UK Equity Income sectors have been the most troublesome sectors.
Assets in dog funds rose from £5.5bn to £8.4bn for the UK All Companies sector and from £2.1bn to £3.1bn for the UK Equity income sector.
UK All Companies and UK Equity income are respectively responsible for 9 and 10 dog funds.
The largest dog funds in terms of assets under management were also to be found in these sectors. They include Invesco UK Equity High Income (£2.8bn), Halifax UK Growth (£3.2bn), Scottish Widows UK Growth (£1.8bn) and Halifax UK Equity Income (£1.7bn).
Bestinvest stated: “This is perhaps surprising, given that it was a much better year for UK equity markets. The high weighting in mining and resources companies, negligible exposure to technology stocks, plus its naturally defensive flavour, proved a significant advantage and it outpaced other markets, such as the US, over the year.
“However, it was a tough year for more domestically focused small and mid cap companies, with the MSCI UK Small Cap underperforming the MSCI UK Large cap by over 20% for the full year.
“Many active managers have a higher weighting in small and mid-cap sectors. This has historically been the sweet spot for performance and offers more stock-picking opportunities. However, it was a significant drag on performance this year, drawing more funds onto the dog list.”
Despite their more defensive flavour and higher weighting in the energy and natural resources sector, sterling’s weakness flattered the earnings of UK large caps. This is particularly true for those with strong dollar revenues.
Small and mid-cap sectors were impacted by the UK precarious domestic situation with turbulent politics, high inflation, increased tax burden and a dismal growth outlook.
Bestinvest stated: “This large cap/small cap divide reversed the situation seen in recent years, where the successful UK managers were those with higher weightings in smaller and mid-cap companies.
“Small and mid-cap companies are the traditional hunting ground for many active managers. Historically, they have offered better diversification, stronger performance and better stock-picking opportunities.
“However, it has not been a successful strategy over the past 12 months.“
The year 2022 did not deliver as much as one could have expected for investors betting on income strategies.
With 10 dog funds, 13% of the UK Equity Income sector was made of underperforming funds.
Bestinvest said: “It should have been a significantly better year for income strategies.
“Dividends have substantially recovered since the pandemic while many international companies received a significant boost from the weak pound.
“Equally, dividend-paying sectors, such as mining and energy were in higher demand with investors, which should have given a boost to dividend strategies.”
Global sector
The global sector was the other weak spot with 11 dog funds. This is because US, technology and communications services sectors have dominated this sector in recent years.
However, 2022 saw a rotation from high-growth to value, which saw the largest constituents in this sector experiencing significant sell-off.
This also has had an impact on sustainable funds.
Bestinvest said: “The other noteworthy theme is the preponderance of sustainable funds.
“It has been a tough year for strategies that exclude fossil fuels. Energy and mining companies have been the only major hiding places in tough markets.
“Equally, these funds tend to have a growth bias, so it has not been an ideal market.
“However, there are some experienced names in the mix – EdenTree, BlackRock, AXA – who should be doing better.”
Investment houses
Schroders was the company with the most dog funds in 2022. While it manages only three relatively small funds under its own name, it is also the underlying manager of the Scottish Widows-branded and HBOS funds.
That adds another seven funds to its tally and a further £7.3bn in assets.
“These funds were performing badly long before Schroders got its hands on them, but investors might have reasonably expected a turnaround by now,” Bestinvest said.
Columbia Threadneedle has for funds in the list managing £185.4m worth of asset, while abrdn has three dog funds with £545.5m of assets under management. As for Invesco, two of its funds worth £2.96bn were deemed to be dog funds.
Mid-cap specialist Unicorn also had a difficult year with three dog funds in the list, worth £474.7m.
Bestinvest also highlighted that Jupiter was a “notable absentee”, as it had three dog funds last year.
More broadly, Bestinvest identified 44 dog funds. This is almost half of the 86 underperforming funds revealed in January 2022 and far below the 150 dog funds identified at the start of 2021.
“It’s worrying that some outsized canines have hit the list. This has pushed the amount of assets held in these mutts up from £10.7bn in our last report to £19.1bn today,” Bestinvest said.
