The best and worst of fund management

My day job is basically interviewing fund managers, trying to identify the ones I think will do the best for my clients. Without wanting to sound too cocky, I'm not too bad at it either – with the help of the other guys on  my research team, the funds chosen for our Core Selection list (the funds we think should be at the heart of people's portfolios) have, on aggregate beaten the benchmark (the IA Flexible sector) by more than 60% over the past 14 years*.

But three times a year I also analyse the performance of all the funds available to us to buy, to identify the duds – those that have underperformed their sector averages consistently over the previous three years. I carried out the latest analysis at the start of this month and I have to say that I'm almost at a loss for words.

The reason for my stunned silence?  The number of funds in the RedZone has risen from 143 (in May) to 239 today. That's quite a phenomenal increase and a worrying rise in consistent underperformance. It seems that instead of having the odd bad year, those managers who are struggling are finding it hard to turn things around.

RedZone assets amount to a third of Greece's debt

The number of assets in the RedZone has also more than doubled since May and is equivalent to one third of the amount of Greece's debt. £101,520 million or £101.52bn. Which ever way you look at it it's a lot.

Looking at individual sectors, IA UK All Companies fares worst with 44 funds and around a third of the assets (£36.63bn). IA Global is second with 25 funds and £6.97bn, and IA UK Equity Income is third with 14 funds and £7.68bn.

As was the case before the summer, the IA UK All Companies sector is dominated by trackers in the RedZone. Both the number of funds and assets have grown - funds have increased from 20 to 27 and assets from almost £20bn to £27bn. Spooky.

To see a full list of RedZone funds, go to www.chelseafs.co.uk/redzone

Emerging market equities and bonds lag while smaller companies reign supreme

On a positive note, of the 30 IA sectors I looked at, only two have had negative average cumulative performance  over the past three years: IA Global Emerging Markets -4.87% and IA Global Emerging Market Bond -7.59%. Every other sector has, on average made money for investors, especially smaller companies, which made up the top four sector averages:

1st IA UK Smaller Companies 62.21%
2nd IA European Smaller Companies 58.07%
3rd IA Japanese Smaller Companies 56.63%
4th IA North American Smaller Companies 52.35%

Interestingly, Templeton had both the best and worst performing funds in the IA Global Emerging Markets sector: Templeton Global Emerging Markets lost 25.83% of investors money over the three years, whilst their Emerging Markets Smaller Companies fund increased in value by 28.90%.

Legg Mason outshines them all

While it's easy to knock passives, the difference between good and bad active management is worth highlighting. Take the IA Asia ex Japan sector, for example. The worst fund, Tiburon Taipan, lost 10.97%, whilst the best fund, Elite Rated JOHCM Asia ex Japan Small & Mid Cap, returned 49.74%. On a £15,000 ISA investment that's the difference between having a savings pot today of £13,354 or £22,461.

Legg Mason was the investment house to reckon with, however. Two out of the top three performing funds belonged to their stable:

1st Legg Mason IF Japan Equity, run by the infamous Hideo Shiozumi, returned 122.47%
2nd Legg Mason Opportunity, a US equity fund, returned 119.79%
3rd Woodstreet Micro Cap, a UK small-cap equity fund, returned 115.39%

As the analysis highlights, doing your research and picking the right funds can make a huge difference to your investment. It's worth taking the time.

By Darius McDermott, managing director, Chelsea