The worst performing investment funds so far this year

Investors have over £53bn across funds that have consistently underperformed, with managers with low or zero exposure to AI-themed stocks and the energy sector lagging.

Global equity funds were the most prominent offenders in Bestinvest’s latest ‘Spot the Dog’ report, with 44 funds making the list, a slight improvement from 51 earlier in the year. A third of these global funds are focused on sustainable investing, missing out on gains from the surge in oil and gas stocks.

UK equity funds also featured prominently, with 44 funds flagged, a significant increase from 12 a year ago. Ethical and sustainable funds make up about a quarter of these underperformers, largely due to their lack of exposure to the UK’s energy and commodities sectors.

The report found 137 equity investment funds holding £53.42bn consistently underperformed. You can read the full list here.

The number of ‘dog funds’ has dropped by 9% since the start of the year, when 151 funds made the list. However, it remains significantly higher than the 56 funds flagged only a year ago.

The value of assets tied up in these underachieving funds has also fallen sharply, dropping to £53.42 billion—44% less than the £95.26bn reported in the previous edition, primarily due to a few large funds narrowly avoiding the list.

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To make it into the list, a fund must have underperformed compared to the market it invests in by 5% or more over a three-year period.

A second filter is that the fund must also have underperformed in three successive 12-month periods in a row.

Fund performance can falter for various reasons, ranging from poor decision-making to investment strategies falling out of favour with current market trends. This issue is particularly pressing as investors question why so many funds continue to lag behind their benchmarks, especially given the recent boom in AI, which has invigorated the US stock market and global equities.

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However, the rally has been driven by a narrow group of US megacap companies benefiting from AI, making it challenging for fund managers who lack exposure to these few giants to keep up.

The AI-driven surge in select stocks fails to capture the broader equity market’s struggles over the past three years. A notable trend, consistent with previous reports, is the high representation of ESG and ethical funds among the underperformers. These funds account for a fifth of the Spot the Dog list, reflecting the unexpected rise in oil and gas prices due to post-pandemic supply chain issues and Russia’s invasion of Ukraine in 2022.

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Jason Hollands, managing director of Bestinvest, said: “The high number of sustainable or responsible funds in the latest Spot the Dog report partly reflects the strong performance of oil and gas stocks in 2021-22. Over the three-year period covered, the MSCI World Energy Index delivered a total return of 98% in GBP, compared to the MSCI World Index’s 28%. Conversely, the alternative and renewable energy market has struggled, with the MSCI Global Alternative Energy Index declining by 38% over the same period.”

Hollands anticipates a reduction in ESG funds on the list in future reports as the impact of surging energy stocks fades. He also noted the dominance of companies like NVIDIA (NVDA), Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (META), and Microsoft (MSFT)—dubbed the “Magnificent Seven”—which have driven market performance recently. The Bloomberg Magnificent Seven Index has surged 42% over the past year, with these companies now making up a significant portion of the S&P 500 (^GSPC) and MSCI World indices.

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The previous edition of the report included two of Britain’s most prominent funds—Terry Smith’s Fundsmith Equity and Nick Train’s WS Lindsell Train UK Equity—but both have now dropped off the list. Despite this, the presence of large funds remains a concern, with ten funds over £1 billion in size accounting for £26.81bn, or half of the assets in underperforming funds.

Hollands said: “The Spot the Dog report is a timely reminder for investors to regularly review their portfolios. While the report highlights underperforming funds, it also stresses the importance of monitoring investments and considering whether changes are needed.

“Identifying whether a fund is struggling due to short-term challenges or more deep-rooted issues is crucial for investors deciding whether to hold or sell.”

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