Lack of US exposure has dented global fund returns

The three worst performing funds in the Investment Association Global and Global Equity Income sectors were Neptune Global Income (GB00B91RFZ23), Aberdeen World Equity Income (GB00B3NG6H45) and St. James's Place Ethical (GB0006074891). 

One reason for the relatively large number of underperforming global equity funds is because US-listed companies represent over half of major global equity indices. This is especially problematic for funds that aim to generate a decent level of dividend income, as the US is one the lowest-yielding developed markets, and means these funds are typically underweight the US which has performed well in total return terms over this period. Eight of the 17 global Dog funds highlighted in the report have income as part of their remit. 

Managers of global equity funds avoiding the US over concerns about their current valuations, which are expensive on a number of measures, have also been wrong-footed over the last three years, as the US stock market has continued to test new highs. 

Tilney Bestinvest comes up with its list of Dog funds firstly by identifying the ones that have failed to beat their benchmark over three consecutive 12-month periods, to highlight those that have consistently underperformed and to strip out ones that may have had a short run of bad luck. It then applies a second filter: the fund must have underperformed its benchmark by 5 per cent or more over the entire three-year period of analysis.

Among UK equity funds only one 'Dog' was identified - St James’s Place Equity Income (GB0008377144). This is the lowest level of UK equity funds since the Spot the Dog report was started 20 years ago, and in sharp contrast to the last Spot the Dog report six months ago, which identified six underperforming UK equity funds. 

UK funds have benefited from a strong rise in UK equity markets over the 12 months following the vote to leave the European Union, with MSCI United Kingdom All Cap index delivering a total return of 23 per cent over that period. 

St James's Place Equity Income's manager, Nick Purves, tries to identify companies he believes are undervalued, but this investment style has been out of favour with markets which have favoured quality growth companies in recent years, according to Tilney Bestinvest. And the fund's performance has also been hurt by its high annual costs of 1.61 per cent.

If a fund you hold appears on a wealth manager’s negative list it doesn't mean you should sell it. There are a number of reasons why a fund could have suffered from poor relative performance over a three-year period such as a style bias that is out of favour with the market or a new manager that still needs time to turn a fund around. And some managers are better suited to tougher times, while others perform better in rising markets. 

Instead, investors should use negative fund lists as a prompt to review their portfolios more generally.

"You have to be careful of taking these lists at face value as they tend to look at short-term performance and any fund can have a period of poor performance," says Adrian Lowcock, investment director at Architas. "I would look at a fund over a minimum of five years and how it's performed over each 12-month period within those five years to see how consistent or volatile it has been. If you do find another fund you want to replace [a poor performer] with, check it is a similar fund in terms of risk and style."

Poor performers: Top five global dog funds