Poor fund performers trap £14bn

The UK’s worst performing funds have grown in size by £1bn since the start of the year, research shows.

Chelsea Financial Services says assets in funds in its Relegation Zone of underperformers now stand at £14bn, with market volatility pushing the number of funds into its list from 79 to 85.

The largest of the laggards is the £1.6bn Scottish Widows UK Growth fund, which also featured in the last Relegation Zone, published in December. This fund has dropped 12.4% over three years compared to an average fall of 8.5% among its peers, yet £17.5m has flowed into the fund since the start of the year.

"The correlation between underperforming funds and increased asset inflow needs to be broken; inertia remains the biggest destroyer of returns," Chelsea managing director Darius McDermott says.

"The largest six funds in the Relegation Zone account for 40% of underperforming assets. This is too much money underperforming for far too long. Investors need to ditch these duds if they are to maximise portfolio returns."

The table is again dominated by SWIP, which has nine of its funds listed, including the £1.5bn Scottish Widows UK Growth and £1.1bn SWIP High Yield Bond funds.

Elsewhere, Axa Framlington UK Equity Income has made a re-appearance in the Relegation Zone, with performance hindered by positions in healthcare and industrials.

"We are surprised and disappointed to see the AXA Framlington UK Equity Income fund re-enter the Relegation Zone," McDermott says. "Its manager George Luckraft is highly regarded but the last few years have exposed some frailties in his stock-picking strategy."

The UBS Absolute Return Bond fund was again rated worst performer relative to peers across all sectors. It delivered 63.49% below the average, largely due to its exposure to mortgage-backed securities in 2008.

McDermott says overall absolute return strategies have done well since the downturn, although some have not performed as promised.

"What blackens the name of such products is funds not doing what quite patently is displayed on the tin: returning a profit to investors come rain, hail or shine," McDermott says.

"What this highlights is that investors should consider carefully the underlying investment strategy and make sure the fund's name matches its process."