Funds from Artemis, Baillie Gifford and Axa Investment Managers have been named among the worst-performing equity funds of the past three years, relative to their peers, in a list dominated by those underexposed to tech or energy stocks, new research has found.
Some 137 funds holding £53.42bn on behalf of investors have underperformed their relevant benchmarks on a regular basis, with funds that have shunned artificial intelligence stocks and energy companies faring the worst, in a sign of the market’s “extreme concentration”, according to wealth manager Bestinvest.
The so-called Magnificent Seven — Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Nvidia, and Tesla — have become so large that they represent about a fifth of the MSCI World index and a third of the US S&P 500 index. Their dominance helps to explain why global fund managers who have not invested in this “extremely concentrated band of influential stocks” have “struggled to consistently beat the markets,” said Jason Hollands, managing director of Bestinvest, part of Evelyn Partners.
Bestinvest’s “Spot the Dog” report focuses on funds that have consistently underperformed their benchmark over three consecutive 12-month periods and by 5 per cent or more over this time.
According to findings, Artemis’s Positive Future fund, which manages just £10mn of investors’ money, was the worst performing, underachieving its benchmark by 71 per cent over three years. The Baillie Gifford Global Discovery fund, which manages £490mn, was in second place, underperforming its benchmark by 65 per cent. An investment of £100 into this fund three years ago, would now be worth just £40, net of fees.
The report comes shortly after renowned British fund manager Terry Smith defended his decision to shun US chipmaker giant Nvidia, which briefly became the world’s most valuable company this year.
Smith said his £25bn Fundsmith Equity portfolio, which includes stakes in Apple, Meta and Microsoft, avoided Nvidia because his team “have yet to convince ourselves that its outlook is as predictable as we seek”. His fund still delivered more than 9 per cent over six months, which he said “would normally be cause for celebration”.
Though tech and AI stocks have been on a tear over the past few years, they suffered from a sharp sell-off in early August due to broader fears over the state of the US economy. Some funds, such as Blue Whale, which is backed by billionaire Peter Hargreaves, bought into Nvidia and other tech stocks to take advantage of the price dip.
Hollands said the “high number of funds badged variously as sustainable or responsible [in the report] is likely in part down to the stellar performance of oil and gas stocks in 2021-22”. The MSCI World Energy Index delivered a total return in sterling of 98 per cent over the three-year period to the end of June — well ahead of the MSCI World Index total return of 28 per cent.
Hollands pointed to the 38 per cent fall in the Global Alternative Energy index over this time, “highlighting why managers focused on green energy have had it hard.”
The report shows that UK equity funds have also lagged behind. A quarter of these comprise ethical and sustainable funds, which lack exposure to the UK market’s sizeable energy and commodities sectors.
The worst-performing UK all-companies funds include the L&G Future World Sustainable UK Equity Focus, the Liontrust UK Ethical, and the Fidelity UK Opportunities.
St James’s Place’s Global Quality fund was among the largest products to have consistently underperformed, managing some £10.69bn. An investment of £100 into this fund three years ago, would be worth £106 today, net of fees. Fidelity’s Global Special Situation funds, which oversees £3.34bn and its Asia fund, £2.71bn, also fell into this category.
The laggards in European equities include the Baillie Gifford European, L&G Future World Sustainable European Equity Focus, and the Liontrust Sustainable Future European Growth.
“Once again, the latest Spot the Dog report serves as a timely reminder to investors to check in on their portfolio at regular intervals to assess how well their assets are performing,” Hollands added.
Liontrust, Artemis, Baillie Gifford, Fidelity, L&G and SJP acknowledged their funds’ performances and noted that they are not an indicator of future results.
Artemis added that, since February, a new manager had been running the Positive Future fund and that changes are being made.
“Performance tables are lagging indicators, especially at times like this, when we believe there is a turning point in the market cycle,” said Liontrust.
Justin Onuekwusi, chief investment officer at SJP, said their costs for the external fund manager, administration, and advice are bundled together in a single ongoing charge. “Most of the funds that we are compared with in this analysis do not include advice and administration charges therefore unfortunately it is not a like-for-like comparison”.
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