Good, independent fund research can really make a difference to an investor's finances, helping to maximise returns over the long term.
However, while choosing the right fund can significantly boost returns, picking the wrong fund can have a devastating effect on your investments too. That's where the Chelsea RedZone comes in.
The Chelsea RedZone is statistical analysis which names and shames the worst-performing funds over three years. Each fund in the list has underperformed their sector average for three consecutive discrete years, and has not had a manager change or process change within the last 18 months.
What a year 2020 turned out to be! Having started January with most equity markets reaching new highs, March saw the fastest bear market crash in history. Most stock markets then recovered almost as quickly.
With such dramatic movements, it certainly sorted out the wheat from the chaff in the investment world.
At the time of writing, it is exactly 300 days since we first went into lockdown. And there are 300 funds in this year’s RedZone – some 70 more than this time last year. To make this list more manageable, we’ve therefore tweaked our analysis.
In addition to the usual filters of a minimum 18 months with the same manager, and three consecutive years of underperformance, we’ve taken out funds with fewer than £20m of assets under management and those that, over the cumulative three-year period, have underperformed the sector average by less than 10%.
As was the case last year, most of the culprits (50 in fact, representing £16.47bn of assets) can be found in the Global sector. The second worst sector was North America, with 26 funds and £9.37bn assets. After such a stellar year for US equities – led in no small amount by the technology sector - positioning in the COVID winners proved a crucial factor for both US and global portfolios.
A number of value strategies in particular struggled. Europe ex UK and UK All Companies were joint third with 11 funds apiece.
Aberdeen Standard Investments has, thankfully, continued its turnaround. The group is joint ‘top’ with Schroders, with six funds each, but assets under management in the RedZone are now down to less than £2bn. JP Morgan, Invesco and UBS were all in joint third with five funds each. The worst offender in terms of assets was in fact Templeton, with two huge funds accounting for £10.11bn of assets.
With value for money statements now mandatory for all fund management companies, the further good news is that consistently underperforming funds are now likely to be addressed in a timelier manner. We’ve already started to see some companies consolidate their ranges and look to provide a better investor outcome.
The DropZone is once again dominated by global energy funds. A price war between Russia and Saudi Arabia, which coincided with a global shutdown, caused the oil price to collapse and turn negative at one point last year - pouring unwanted oil onto already troubled performance. With many economies looking to ‘build back better’ with cleaner energy, it’s unlikely the sector will rebound strongly.
Sitting in the DropZone is one Chelsea Selection fund: Ninety One Global Special Situations. It follows one of those deep value strategies I mentioned earlier. We still have faith in the value style of investing. And while we only hold a small amount in the VT Chelsea Managed range, the danger of giving up on this type of fund was highlighted in the last few months of 2020. The vaccine bounce saw value stocks jump some 10% in a matter of days and, over the past three months, this fund is actually the third best performing in its sector*.
|Position||Fund name||% underperformance from sector average|
|1||Schroder ISF Global Energy||81.57|
|2||Guinness Global Energy||77.39|
|3||Denker Global Financial||43.41|
|4||Ninety One Global Special Situations||38.95|
|6||NFU Mutual Global Growth||34.99|
|7||M&G North American Value||34.48|
|8||MFS Meridian US Value||33.87|
|9||BNY Mellon US Equity Income Fund||33.28|
|10||Robeco BP US Large Cap Equities||33.21|
Past performance is not a reliable indicator of future returns. Please note that the RedZone and DropZone do not constitute investment advice. If you are in any doubt as to the suitability of any investment you should seek professional advice. An appearance of any fund in these lists is not an indication they should be sold or switched.