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Veteran stock pickers Terry Smith and Nick Train have appeared for the first time on Bestinvest’s list of underperforming funds.
Twice a year, the investment platform denounces and shames the worst-performing investment funds: its “Spot the Dog” report reveals which funds belong in the doghouse and which have exceeded expectations.
Fundsmith Equity and WS Lindsell Train UK Equity, managed by Smith and Train respectively, appear on the list for the first time after underperforming for the past three years.
In the dog house: Terry Smith and Nick Train funds appear for the first time in Bestinvest report
Fundsmith has been surprised by its lack of exposure to mega-cap technology stocks, called the Magnificent Seven, and energy companies.
In 2023, the fund rose 12.4 percent, marking a return to growth after falling 13.8 percent in 2022.
But it lagged the benchmark MSCI World Index, which rose 16.8 percent. It also underperformed in 2021 and 2022.
Smith’s “quality growth” style has also fallen out of favor, with 2023 set to be a tough year for consumer staples companies, which make up about a quarter of Fundsmith’s portfolio.
“Three years is still a relatively short time frame for Smith’s ‘buy and hold’ investment approach,” says Bestinvest. “However, it shows that even the strongest managers can go through difficult times.”
Train also suffered in a market that has not favored his style of investing in quality companies with strong brands.
While Fundsmith and Lindsell Train have had a run of poor performance over the past three years, both have returned “significantly above” their respective benchmarks over the long term.
Other funds have also suffered from the dominance of major technology stocks, creating a difficult environment for active managers who had no exposure.
In the six months to December 31, 2023, the report has seen a more than 170 percent increase in the number of investment funds described as dogs.
The value of assets held in dog funds also rose 106 percent to £95.3 billion, from £46.2 billion in July 2023.
How do you label a bottom as a dog?
While more funds have entered the doghouse, Bestinvest does not name or shame a fund just because there has been some volatility or even if the fund has a style that might be out of fashion.
Instead, it looks at funds that have a more deep-rooted problem to address, so to qualify as a dog, a fund must have generated a worse return than the market it invests in in each of the last three years.
It rules out funds that just had a bad year, although some analysts prefer to judge funds by their five- or 10-year performance.
A fund must also have underperformed the market by more than 5 percent over the three-year period.
The report only analyzes funds that are open to retail investors, excluding those that only institutional investors can access.
Bestinvest’s Spot the Dog report analyzes fund performance over three years
What other funds have performed poorly?
The global sector had the highest number of underperforming funds, doubling from 24 to 49 in six months.
The three-year period to the end of 2023 covered the reopening of economies following the pandemic, the war in Ukraine, the cost of living crisis and the impact of AI. Very few managers managed to successfully navigate all of these changes.
Almost a quarter of all dogs were global funds, with 49 listed, representing £61 billion (30 per cent) of all assets.
This included the Fundsmith Equity fund and St James’s Place Global Quality.
UK market languishes in 2023; Despite cheap valuations, sentiment remained poor.
Around 18 per cent of dog funds came from the UK all companies sector, present in all parts of the market.
Growth funds SVM UK Growth, Premier Miton UK Growth and AXA Framlington UK Select Opportunities appeared, as well as value funds such as M&G Recovery.
Ten of the 34 funds had a “sustainable” mandate, reflecting the fact that many did not own the fossil fuel companies that drove markets higher in 2021-22.
What to do with your savings if they are in a dog fund
Bestinvest is very clear that its report is not a list of funds that should be automatically sold.
The report is based on an analysis of past performance which is not a guide to how a fund will perform in the future.
Rather, they are funds that appear to deserve greater attention.
Bestinvest states that “unless there are good reasons to believe that performance will improve based on an assessment of its prospects, it may make sense to switch to an alternative fund.”
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