Terry Smith and Nick Train make Bestinvest’s ‘Spot the Dog’ list of funds for the first time

Veteran stockpickers Terry Smith and Nick Train have featured in Bestinvest’s list of underperforming funds for the first time.

Twice a year, the investment platform names and shames underperforming investment funds, with its ‘Spot the Dog’ report revealing which funds belong in the dog house and which have exceeded expectations.

Fundsmith Equity and WS Lindsell Train UK Equity, managed by Smith and Train respectively, make an appearance in the list for the first time after underperforming for the past three years.

In the dog house: Terry Smith and Nick Train’s funds feature in Bestinvest’s report for the first time

Fundsmith has been caught out by its lack of exposure to mega-cap tech stocks, dubbed the Magnificient Seven, and energy companies.

In 2023 the fund rose by 12.4 per cent in 2023 marking a return to growth after slumping by 13.8 per cent in 2022.

But it lagged behind the MSCI World Index benchmark, which rose by 16.8 per cent. It also underperformed in 2021 and 2022.

Smith’s ‘quality growth’ style has also been out of favour with 2023 a tough year for consumer staples companies, which make up around a quarter of Fundsmith’s portfolio.

‘Three years is still relatively short term for Smith’s ‘buy and hold’ investment approach,’ says Bestinvest. ‘However, it shows that even the strongest managers can go through tough patches.’

Train also suffered in a market that hasn’t favoured his style of investing in quality companies with strong brands.

While Fundsmith and Lindsell Train have had a run of bad performance in the past three years, both have delivered returns ‘significantly ahead’ of their respective benchmarks over the longer term.

Other funds have also suffered from the dominance of leading tech stocks, creating a tough environment for active managers who didn’t have exposure.

In the six months to 31 December 2023, the report has seen a more than 170 per cent jump in the number of investment funds described as dogs.

The value of assets held in the dog funds were also up 106 per cent to £95.3 billion, from £46.2 billion in July 2023.

How does a fund get labelled a dog?

While more funds have entered the dog house, Bestinvest doesn’t name and shame a fund just because there’s been some volatility or indeed 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 delivered a worse return than the market it invests in each of the last three years.

It rules out funds that have just had a bad year, although some analysts prefer to judge funds on their five or ten-year performance.

A fund must also have underperformed the market by more than 5 per cent over the three-year period.

The report only looks at funds that are open to retail investors, taking out those only accessible to institutional investors.

Bestinvest’s Spot the Dog report analyses performance of funds over three years 

Which other funds have performed badly?

Global sector had the highest tally of underperforming funds, doubling from 24 to 49 in six months.

The three-year period to the end of 2023 covered economies reopening from the pandemic, the war in Ukraine, the cost of living crisis and the impact of AI. Very few managers managed to successfully navigate all those changes.

Nearly a quarter of all dogs were global funds, with 49 making the list, representing £61 billion (30 per cent) of all assets.

This included Fundsmith Equity and St James’s Place Global Quality fund.

The UK market languished in 2023 – despite cheap valuations, sentiment remained poor. 

Some 18 per cent of dog funds were from the UK All Companies sector, featuring across 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, like M&G Recovery.

10 of the 34 funds had a ‘sustainable’ mandate, reflecting the fact that many did not hold fossil fuel companies that led markets higher in 2021-22.

What to do with your savings if they’re in a dog fund

Bestinvest is very clear that its report is not a list of funds that should be sold automatically. 

The report is based on an analysis of past performance which is not a guide to how a fund will perform in the future.

Instead they are funds that appear might warrant a further look. 

Bestinvest says ‘unless there are good reasons to believe performance will turn around based on an assessment of its prospects, it may make sense to switch to an alternative fund.’

This post first appeared on Dailymail.co.uk