Bestinvest’s latest bi-annual snapshot of fund performance (or more notably underperformance) has revealed 151 equity investment funds holding £95.26 billion of investors’ wealth are in the doghouse this year, having consistently underperformed their relevant market index over the last three years*. This represents a 170% jump on the 56 funds featured in the previous edition in mid-2023.
The biggest culprits stuck firmly in their kennels appear to be global equity funds, with 49 featured in the report – more than double the 24 featured in the August edition and representing one in five global funds analysed.
The tally of UK funds also looking rather dogged also rose sharply, up from only five in the last report to 34 in this edition. Soaring energy and commodity prices during 2021 and 2022 left managers who were underexposed to these parts of the market lagging the index.
Even funds managed by respected fund managers – Terry Smith of Fundsmith and Nick Train of Lindsell Train – have trailed recently, despite delivering stellar, index-beating returns over the longer term.
Readers can access Bestinvest’s full list of dog funds, which can be downloaded free of charge: www.bestinvest.co.uk/investment-insights/spot-the-dog. Otherwise, Bestinvest have shared a snapshot of their detailed analysis into this latest ‘Spot the Dog’ report with us, as you can read below:
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Equity markets enjoyed a storming end to 2023, with a sharp rebound from November as optimism about the prospect of interest rate cuts spread like wildfire.
However, for much of the year prior to this, large parts of the stock market struggled to make headway as concerns brewed about inflation, the impact of rising borrowing costs and the risk of recessions.
A notable exception to this were the incredible gains made by a handful of US mega-cap stocks. These include familiar names such as Alphabet (which owns Google), Amazon, Apple, Meta Platforms (owner of Facebook), Microsoft, chipmaker NVIDIA and Tesla – which have earned the moniker the ‘Magnificent Seven’. These titans benefitted from investor excitement about the potential benefits to their businesses from Artificial Intelligence.
During 2023, the Bloomberg Magnificent Seven Index, comprised of an equal weighting in these companies, increased by an impressive 107%. And with these companies now representing over 29.0% of the US S&P 500 Index and 19.8% of the MSCI World Index, overall returns from these widely used market benchmarks were therefore heavily influenced by an extremely small number of influential stocks.
But over the last three calendar years, the best performing global industry sector has been energy shares, with the MSCI World Energy Index delivering a total return of 125%*, well ahead of the MSCI World Index total return of 38%*. The energy rally gathered pace in 2021 as economies emerged from the restrictions of the COVID pandemic and accelerated further in 2022 when Russia’s invasion of Ukraine sent oil and gas prices rocketing.
The breakaway performance of the ‘Magnificent Seven’ from Autumn 2022 onwards and soaring energy shares in 2021 and 2022, has had a dramatic knock-on effect on the latest edition of Bestinvest’s Spot the Dog Report. The biannual study, which has been produced since the mid-1990s, is designed to highlight the funds that underperformed their relevant market index over three consecutive 12-month periods and by 5% or more over the entire three years analysed.
As a result of big shifts in the market environment over the last three years, very few funds managed to consistently beat their benchmarks because of big swings in the performance of different industry sectors. The number of funds that managed to come out ahead of the market in each of these three years of very different market conditions was tiny, with just 4% of the universe of global equity funds analysed by Bestinvest having outperformed the MSCI World Index in all three years.
While very few funds consistently outperformed, the number that found themselves on the dog list has ballooned. In the latest edition of Spot the Dog, 151 equity funds met Bestinvest’s longstanding screening criteria – that’s a 170% increase on the 56 funds highlighted in the last report released in August. The value of assets held by dog funds was also up by a whopping 106% to £95.26 billion from £46.2bn in August.
The surge was particularly prevalent in the global sector, which featured the highest tally of dog funds overall, with 49 included, doubling from 24 funds in mid-2023. Almost half the global funds in the list focus on sustainable investing and therefore did not participate in the sharp rise in oil and gas-related shares (nor defence stocks) during this period. It was also a tough period for renewable energy companies, with the MSCI Global Alternative Energy Index declining by -45%*.
There was also a rise in the number of UK funds featured in the latest Spot the Dog survey, with 34 funds holding £12.0bn of investors’ wealth now featured, up from the admittedly very low number of just five funds in the previous edition and a 253% increase on the £3.4bn of wealth. Ethical and sustainable funds are also prominent in the list of underperforming UK equity funds, due to lack of exposure to the UK market’s large energy and commodities sectors**.
Big shifts in the market environment over the last three years saw major lurches in performance between managers who focus on undervalued companies and those who target ‘growth’ stocks, making it very difficult for managers to consistently beat the index. Even funds managed by two of Britain’s most-prominent fund managers, Terry Smith and Nick Train – respectively the Fundsmith Equity and WS Lindsell Train UK Equity funds – now make an appearance in the latest edition of Spot the Dog for the first time ever. It should however be noted both funds have delivered returns significantly ahead of their relevant indices over the longer term.
Jason Hollands, Managing Director of Bestinvest, the DIY investment platform and coaching service, said: “Spot the Dog has been highlighting underperforming investment funds for three decades to encourage investors to keep a closer eye on their investments. It is not a ‘sell’ list but a prompt to check on your investments and if any have underperformed recently to understand why and consider their prospects.
“These last three years have been one of the most challenging periods in living memory for fund managers to consistently beat markets, because of sharply divergent performance from different sectors as the world reopened from the pandemic, followed by a war in Europe and, more recently, excitement about Artificial Intelligence driving extreme market concentration in a small cluster of mega-sized companies.
“When two of the most widely held funds are included in the list, run by respected managers, it is important to explore why this may have happened.
“Fundsmith Equity is a global equity fund that invests in a relatively concentrated portfolio, unconstrained from following a market index. Terry Smith, the manager, targets quality companies that generate high returns on capital and aims to hold them for the long term. The manager has always been clear that he does not seek to trade shares on shorter term factors, chase fads nor make big macro-economic bets. For example, the fund doesn’t own shares in companies that are highly sensitive to the ups and downs of the economic cycle, and has had no exposure to energy, the best-performing sector over the last three years. Neither is the fund heavily invested in technology companies, with the largest exposure being to consumer staples and healthcare.
“Since inception in November 2010, Fundsmith Equity has delivered a total return of 563%, well ahead of the 351% return from the MSCI World Index over the same period, which is important to put the more recent lag in context. Importantly, the philosophy and process of the fund hasn’t changed, and the manager is sticking to an approach that has served investors incredibly well over the longer term. We much prefer fund managers who are clear and consistent in their approach, rather than prone to reacting to shorter term factors.”
Hollands added: “The WS Lindsell Train UK Equity fund is another prominent fund in the latest list. Like Fundsmith, manager Nick Train and the team at Lindsell Train also take a long-term, buy-and-hold approach, backing a highly concentrated portfolio of businesses they regard as exceptional. The fund does not seek to position for the latest market trend or near-term economic outlook, the approach is focused on company specific attributes. The manager looks for companies that can generate lots of cash on a consistent basis and which have hard-to-replicate competitive advantages such as strong brands.
“These attributes mean the fund has a strong skew to areas like beverages, personal goods and financial services. It has no exposure to energy, the best performing part of the UK market over the last three years, when oil prices surged as economies reopened following the pandemic and war broke out between Russia and Ukraine. While this has hampered relative performance over the last three years, since launch in 2006 the fund has returned 404%, well ahead of the 148% return from the MSCI UK Index.”
The Spot the Dog report acknowledges that funds can go through weaker periods for a variety of reasons: poor decision making, a run of bad luck, instability in the team or because the fund has a style or process that may be temporarily out of fashion with recent market trends. Identifying whether these are short-term factors that will eventually pass, or more problematic, is key and investors should ask several questions before they take any action.
Things to consider might include whether there have been important changes in the management team or the process, whether a fund manager is now too burdened with additional responsibilities, or if changes in the size of the fund may have impacted the approach.
Whatever questions you ask, remember Spot the Dog is not a ‘sell’ list – instead it is a statistical snapshot of fund performance at a particular point in time, looking backwards, rather than forward, and should therefore prompt further investigation.
Hollands added: “When you invest in funds that either screen out certain types of companies, for example due to sustainable or ethical criteria, or where managers are prepared to take a high conviction approach that is unconstrained from following a market index, this can result in significant differences in performance from the market benchmarks, leading to periods of both underperformance but outperformance too.”
* Returns cited are in total return terms (including dividends) in GBP terms. Source: Lipper for the three years to 31/12/23).
** The energy and materials sectors respectively represent 11.3% and 9.6% of the MSCI UK All Cap Index (as at 31/12/23).
Top 10 worst performing dog funds overall
| Fund | IA Sector | Size (£bn) | Value of £100 invested after 3 years | 3-year under performance (%) | |
| 1 | Baillie Gifford Global Discovery | Global | 0.61 | £47 | – 70% |
| 2 | SVS Aubrey Global Conviction | Global | 0.04 | £71 | – 62% |
| 3 | AXA ACT People & Planet Equity | Global | 0.02 | £76 | – 57% |
| 4 | FTF Martin Currie Japan Equity | Japan | 0.23 | £55 | – 54% |
| 5 | Aegon Sustainable Equity | Global | 0.17 | £79 | – 53% |
| 6 | L&G Future Wld Sust. UK Eq Focus | UK All Cos | 0.14 | £78 | – 52% |
| 7 | Premier Miton US Smaller Cos | N.Amer.Sm.Cos | 0.04 | £72 | – 52% |
| 8 | SVM UK Growth | UK All Cos | 0.10 | £79 | – 51% |
| 9 | L&G Future World Sust Eur Eq Focus | Europe Ex. UK | 0.04 | £73 | – 51% |
| 10 | Baillie Gifford Japanese Smllr Cos | Japan | 0.24 | £60 | – 49% |
Source: Spot the Dog, February 2024
*Performance figures shown are net of fees with income reinvested
Top 10 biggest beasts by size
| Fund | IA Sector | Size (£bn) | Value of £100 invested after 3 years | 3-year under performance (%) | |
| 1 | Fundsmith Equity | Global | 23.4 | £118 | -14% |
| 2 | SJP Global Quality Fund | Global | 11.0 | £109 | -23% |
| 3 | SJP International Equity | Global | 6.8 | £112 | -21% |
| 4 | WS Lindsell Train UK Equity | UK All Cos | 3.9 | £111 | -19% |
| 5 | Fidelity Global Special Situations | Global | 3.1 | £119 | -14% |
| 6 | Fidelity Asia | Asia Pacific | 2.6 | £80 | -13% |
| 7 | JPM Emerging Markets | Glbl Emerg Mkts | 2.1 | £76 | -16% |
| 8 | BNY Mellon Long-Term Global Eq. | Global | 1.9 | £125 | -8% |
| 9 | Janus Henderson Glbl Sustain.Eq | Global | 1.8 | £116 | -16% |
| 10 | Ninety One Global Environment | Global | 1.8 | £99 | -34% |
Source: Spot the Dog, February 2024
*Performance figures shown are net of fees with income reinvested.
* How a fund becomes a Dog
Bestinvest only analyses UK domiciled and regulated open-ended investment companies (OEICs) and unit trusts that invest predominantly in equities. We also only look at funds open to retail investors. To make it onto the list, we apply two filters. First a fund must first have failed to beat the appropriate benchmark index over three consecutive 12-month periods, to highlight consistent underperformance. Second, the fund must have underperformed the benchmark by 5% or more over the entire three-year period of analysis – which in this case ends on December 31, 2023.
