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The boost for value stocks during the Covid-19 recovery this year helped to cut the number of funds that performed much worse than the market, according to an industry report.
Value funds that have long been out of favour — overshadowed by the success of growth-oriented funds — saw their fortunes recover somewhat as investors turned cautious about tech companies and other growth stocks.
The number of underperforming “dog” funds in the twice-yearly scorecard compiled by investment provider Bestinvest, which names the worst-performing UK-based funds, has dropped to just 77 — down from 119 six months ago. The amount of investors’ money sitting in underperforming funds almost halved to £30bn.
“Some of the more value-biased managers and income managers who were on the list last time have escaped,” said Jason Hollands, managing director at wealth manager Tilney Smith & Williamson, which owns Bestinvest.
“The first five months of the year saw a rebound in value and cyclical stocks. It remains to be seen if that is an ongoing trend,” he said.
The improved report card on fund performance comes as the UK’s financial regulator has stepped up pressure on fund managers to prove their worth to investors and justify their fees. The Financial Conduct Authority (FCA) last month said many fund managers were still failing to meet the minimum standard for reporting to their clients on value for money, following new rules imposed in 2019.
“Overall, we expect more rigour from [fund managers] when assessing value in funds. This will help ensure that investment products represent good value,” the regulator said.
Boring Money chief executive Holly Mackay said the FCA’s rebuke to the industry included a particular warning for managers who focus on value stocks, an investment style that has struggled in recent years.
“Value managers will sit up and take note that the FCA took a seemingly dim view of citing investment style as a long-term “get out of jail free” card for relative underperformance,” she said.
The sharp fall in the number of dismally performing funds was facilitated by a resurgence of value and cyclical stocks — such as banking, energy and commodities. “The prospect of economic recovery following the successful [Covid-19] vaccine rollout has created a better environment for many sectors left behind in the recent excitement over high-growth sectors,” the report said.
The report dubs funds a “dog” if they have underperformed Bestinvest’s benchmark for the market they invest in by at least 5 per cent over the past three years. The number of funds on the list dropped back to levels last seen in the summer of 2019, after spiking during the market tumult caused by the Covid-19 pandemic.
The US, where high-growth tech companies dominate the market, continued to be a perilous environment for active stockpickers. Nearly a quarter of UK-based funds investing in North American equities were rated as laggards in the report.
The fact that so many active managers have performed worse than the market strengthens the argument from some investors that the best way to invest in the US is through passive index funds. Legendary investor Warren Buffett has said that he would like to see 90 per cent of his wife’s money invested in an S&P500 tracker after his death.
Finding an edge in the US is particularly difficult for UK-based investment teams, Hollands added. “It’s quite hard to pick stocks from London in the US,” he said. “Boots on the ground do matter.”
A bright spot for active managers came from funds investing in smaller companies, where stockpickers can hunt for hidden gems, with barely any small-cap funds on the list of poor performers.
The Bestinvest report also delivered some good news for Invesco. The company no longer ranked as the fund manager with the most money in dog funds, after holding that position for three years. Invesco’s chief investment officer, Stephanie Butcher, has been credited with helping to turn around the fund manager’s performance since her appointment last year.
The manager with the most money in poorly-ranked funds was HBOS, with £6.85bn in five funds. Scottish Widows also fared badly, with £2.73bn in four underperforming funds. Both fund brands are owned by Lloyds and several of them are run under contract by Schroders.
“These equity funds — often described as quant or multi-factor equity — are designed to bring benefits to investors over the long term,” Lloyds said. Lloyds cut the fund fees for most customers following a review of charges last year.
Schroders said: “Overall, this report reflects the ongoing strong outperformance we are achieving for clients and, as a long-term investor, we are confident we will repay our clients’ commitment by navigating any short-term challenges to deliver returns well into the future.”