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Funds in the dog house

By Naomi Caine

Investors have more than £8 billion in poor performing "dog" funds - a massive increase of more than 160% over the past six months. And some of the worst offenders are big names, such as Prudential and Scottish Widows.
A fund is kicked into the dog
kennel if it has failed to beat its benchmark in each of the last three years. It must also have underperformed its benchmark by at least 10% over the 36 months, according to the Spot the Dog Guide, published by Bestinvest, an independent financial adviser. It names and shames 52 funds - up from 38 in the previous six-monthly study.

The biggest "dog" funds
The worst offender by value is the 'flagship' £2.2 billion Prudential UK Growth fund, which is managed by M&G. The fund is actually worse than a dog because it has also failed to beat the FTSE All Share in eight of the last 10 years. It's a pretty poor show - but a profitable one for the fund manager. Based on the current fund size, investors collectively pay Prudential over £33 million a year through the 1.5% annual management charge. How can Prudential justify charging so much for so little?
Mark Hinton, a fund analyst at Bestinvest, says: "Too many fund managers turn in mediocre performance, failing to add enough value to compensate for charges." The Pru argues that it has taken steps to improve the performance of the fund with a change of manager this year, but why did it take so long?

Henderson has made no less than 12 fund manager changes over the last two years in an effort to boost performance. However, it still has three large dogs - Growth & Income, UK Equity and European - with a total of £1.1 billion. And most of its funds have failed to beat their benchmarks over the last year, so there's little evidence yet of improvement.
In third place is St James's Place with £667 million in its one dog fund, the UK & General Progressive. The fund has a fairly decent long-term record, but it was wrong footed by the recent strong performance of the stock market.

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Who's to blame?
You can't put the woeful performance of Canada Life's two dog funds (£663 million) down to poor timing. The managers of Canlife Growth have done so badly over their career that Bestinvest estimates there's only a 1 in a 1,000 chance it was due to bad luck. In other words, don't expect a turnaround any time soon. They are probably not very good fund mangers. The prospects for the other dog fund, Canlife General, don't look much better.

Scottish Widows has £656 million in dog funds. January's worst offender has fallen several places but it's mainly thanks to the influx of big dogs from other groups rather than any fundamental improvement in Scottish Widows' performance. Again, there have been some changes - more than 18 funds have switched manager over the past two years. But it's not really helped: more than half the group's funds have failed to beat their benchmark over the last year.

The £443 million First State Global Emerging Markets fund makes its third consecutive appearance in the list of shame - and it's disappointing. The manager, Angus Tulloch, has a good reputation built on a robust long-term record, but his cautious approach has not served him well recently. The fund has picked up over the last couple of months, but Tulloch still has a long way to go if he's to climb back up the performance charts.

Falling stars
'Star' managers are not immune to bouts of poor performance and the recent stock-market volatility seems to have caught a few out, particularly some of the more aggressive managers. Carl Stick, who runs Rathbone Special Situations, and James Ridgewell of New Star UK Special Situations were among the biggest fallers.

Does the big increase in the number of dogs mean fund managers are getting worse? Justin Modray of Bestinvest thinks not. He says: "The number of dogs historically tends to fall when volatility is low and rise when it is higher. The recent increase in volatility means we're likely just seeing the number of dogs starting to return to their natural level."

Time to switch
If you have money in a dog fund, you should not automatically switch. Past performance is not always a guide to the future. Last year, for example, F&C analysed the performance of more than 5,000 funds since 1995 and found that two thirds of the worst performers over three years were no longer in the bottom quartile two years later. Almost one in four had climbed into the top quartile.

But you need to have a good reason to hold onto the fund. For example, a poor manager might have recently been replaced with a better one, or a skilful manager may have simply suffered a poor short-term run. It sounds like an excuse, but different stock market cycles can really play against different investment strategies.

If your fund is a persistent poor performer, you should have a rethink. You should also give your adviser a call. Advisers normally take renewal commission each year, so you need to know what they are doing for the money.

It's cheap and easy to switch your fund through an internet supermarket. It can also be a good time to review your whole portfolio. Modray says: "Investors should regularly check that their portfolio balance is appropriate to their needs. I fear the rising markets of the last three years have encouraged some investors to bite off more risk than they can chew."

Of course, it's not always easy to pick the right fund. A recent study by New Star found that only one in 34 managers have beaten the average in each of the past five years. The lacklustre performance is partly down to charges, which eat into returns.
But you should also remember that picking the right fund is only half the story. A fund that invests in Japan, for instance, will almost invariably do badly if the market slumps. So you have to pick your sectors and markets with equal skill.

Click here to visit Yahoo!'s Investment Fund Centre

For a free copy of the Bestinvest Spot the Dog guide, call 0800 093 0700


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