Have British fund managers become a pointless expense for investors?

fund managers

It is an open secret in the City of London that the vast majority of fund managers are bad at their job. Picking stocks that will consistently beat the rest of the market is notoriously difficult, yet the multibillion-pound investment management industry relies on the belief that managers in the Square Mile have talents worth paying a lot of money for.

This belief is hurting investors. Savers are paying £115m a year in fees to Britain’s worst fund managers, who have failed to beat their benchmark index over a three-year period, a new report has warned.

Broker Bestinvest’s Spot the Dog report, which names and shames funds that return substantially less than their benchmark, found that savers had entrusted more than £10bn to underperforming “dog” funds.

Funds that invest in British stocks dominate the dog list: they make up half of the 10 largest underperformers and 70pc of the total £10.8bn in ­lagging assets.

Lloyds Banking Group was responsible for two thirds of underperforming assets. Its Halifax UK Growth, Scottish Widows UK Growth, Halifax UK Equity Income and Scottish Widows UK Equity Income funds are among the worst performers.

These funds have lost investors 5pc, 6pc, 2pc and 3pc respectively in the past three years, while the FTSE 100 – London’s major index – has gained 3pc.

The Jupiter UK Growth fund also featured in the top 10. It has fallen behind its benchmark by 24 percentage points, the worst performance in the “UK all-­companies” sector.

Jason Hollands, of Bestinvest, said that while short periods of weakness might be forgiven, persistent underperformance should ring alarm bells.

“There can be more concerning factors at work, such as changes in the management team or a fund becoming too big, which might constrain its flexibility, or a manager straying from a previously successful approach,” he said.

A spokesman for Lloyds Banking Group said: “We continue to take a long-term approach to investment management and we work continuously to improve performance across our entire fund range.”

A spokesman for Jupiter said: “We have made changes to the teams of the funds listed and it is our expectation that these actions should improve future outcomes for our clients.”

Overall, the worst performer was the £39m FTF Martin Currie Global Unconstrained fund, which has fallen 34 percentage points behind the global stock market.

A spokesman for Martin Currie said the underperformance was due to a recent change in investment style in favour of high-quality “growth” stocks, which have sold off this year, and away from cheap “value” stocks.

Just 12pc of the managers of UK-focused funds beat the FTSE 100 in the first half of this year, according to a separate report from the broker AJ Bell. The average UK fund lost 14pc, against a drop of 4pc in a passive fund.

Robin Powell, an investment fees campaigner, said: “Fund managers have told us for years that it is in times of volatility that they offer the most value. Yet in one of the most volatile trading periods in recent market history, they are largely underperforming.”

Mr Powell said UK-focused fund managers typically had a bias towards small and medium-sized companies, which exacerbated their underperformance.

“Smaller companies tend to have a better long-term growth story, which is why fund managers buy them,” he said. “But these stocks suffer more during periods of economic uncertainty.”

Mr Powell advised DIY investors to take a more “passive” approach to their portfolio and pick funds that tracked the market instead of paying a manager to try to beat it.

For example, if a saver had invested £10,000 a decade ago in the HSBC MSCI World ETF, which mimics the global stock market, it would now be worth £34,035. By contrast, if they had invested in an average actively managed global fund, they would now have £27,934 – or £6,101 less.

However, Mr Hollands said fund managers who operated in more niche corners of the market could offer investors value that a tracker fund could not.

“In parts of the market that are poorly covered by analysts and which are barely touched by passives, there are more opportunities for active managers to spot hidden gems and add value,” he said.

“It is much harder to beat the market when it comes to highly liquid and heavily scrutinised parts of the market.”