Bestinvest’s latest half-yearly ‘Spot the Dog’ snapshot of fund performance revealed that underperforming funds held £95.26bn of investors’ money.

The last edition of the report, published in mid-2023, featured just 56 funds while the value of assets held by 'dog' funds was only £46.2bn.

The massive increase in underperforming funds is as a result of big shifts in the market environment over the last three years, the firm said.

Jason Hollands, managing director of Bestinvest, said: “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.”

An unusual market backdrop in the period saw sharp gains in oil and gas shares and more recently dramatic share price rises in a narrow band of US mega-cap growth companies dubbed the ‘Magnificent Seven'.

Familiar names such as Alphabet (which owns Google), Amazon, Apple, Meta Platforms (owner of Facebook), Microsoft, chipmaker NVIDIA and Tesla benefitted from investor excitement about the potential benefits to their businesses from Artificial Intelligence.

Global equity funds were prominent in the 'dog' list with the number featured in the report more than doubling from 24 to 49. 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 the period.

The tally of UK funds in the doghouse also rose sharply, up from only five in the last report to 34 in the latest 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 two of Britain’s most-prominent fund managers, Terry Smith and Nick Train - the Fundsmith Equity and WS Lindsell Train UK Equity funds - made an appearance in the latest edition of Spot the Dog for the first time ever. However both funds have delivered returns significantly ahead of their relevant indices over the longer term.

Mr Hollands said: “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, he explained. The manager does not trade shares on shorter term factors, chase fads nor make big macro-economic bets.

Mr Hollands said: “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 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 become more problematic, is key. 

Top 10 worst performing dog funds overall 

Source: Spot the Dog, February 2024 *Performance figures shown are net of fees with income reinvested

Top 10 biggest beasts by size 

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. It also only looks at funds open to retail investors. To make it onto the list, it applies two filters. First a fund must 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 ended on December 31, 2023.

• 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).