For more than 30 years, the investment platform Bestinvest has published its now well-known Spot the Dog list. The list, which comes out twice a year, features the worst-performing funds over the previous three years.
Of course, a fund’s performance depends largely on what sort of assets the fund invests in. Even the best-performing Emerging Markets equity fund, for example, will struggle to provide a positive return when Emerging Markets are in a bear market. But the Spot the Dog takes this into account. To be included on the list list, a fund will have underperformed the relevant market benchmark over three consecutive 12‑month periods and by 5% or more over the entire three years analysed.
The latest edition of the Spot the Dog list has just been published and covers the three-year period to the end of December 2024. This time, 137 funds met the criteria for inclusion in the list. That’s the same number of funds as there were in the previous list published in August, but several very large funds have now joined it, which means that the size of assets represented has risen from £53.4 billion last time to £67.4 billion.
List includes 15 funds with more than £1 billion
The current list, in fact, includes no fewer than 15 funds with more than £1 billion in assets. Together these funds manage more than £40 billion of investors’ wealth. The biggest fund of all is the St James’s Place Global Quality fund, which manages £9.4 billion.
As always, the list includes funds from some of the best-known companies in the UK fund industry. As well as St James’s Place, the new edition includes funds from Fidelity, Baillie Gifford, Liontrust, Artemis, Lindsell Train and Columbia Threadneedle.
The sector with the largest number of laggards is the global equity sector. All 44 funds in that sector underperformed by more than 10% over the three-year period, and the worst performer of all, the rather unfortunately named Artemis Positive Future fund, produced a negative return of -63%!
The sector that produced the worst returns relative to the benchmark was the Japanese equity sector. The seven Japanese equity funds on the latest list produced a median performance of -25%.
What should dog owners do?
But what does all this information tell us? And what does it mean if you yourself are invested in one or more funds on the list? What should a responsible “dog” owner do?
Now you might have thought that the logical response would be to take your money out of the worst performers and invest it instead in funds with the highest returns over the last three years. And, to a large extent, that’s what the investing industry would like you to do. Ultimately, brokers get paid when they buy and sell, and companies like Bestinvest earn fees when we invest in funds on their platform.
But selling the losers and buying the winners — or churning as it’s sometimes known — is about the worst thing an investor can do. Why? Because past performance tells us very little of value about future performance. Indeed, funds that have produced strong returns in the recent past are often just the ones that produce lower returns in the future, and vice versa. Tomorrow’s hero, in other words, is often tomorrow’s zero.
Is there a case, then, for deliberately buying funds on the Spot the Dog list? Well, that depends on how much of a gamble you’re willing to take, and it certainly isn’t something that we would recommend.
The real lesson to learn from Spot the Dog
The real lesson from the Spot the Dog list, in our view, is to avoid investing in traditional active funds that aim to outperform through stockpicking or market timing altogether. As scorecards like SPIVA from S&P Global or the Morningstar Active/ Passive Barometer show us, most active funds underperform for most of the time, and, over the long-term, only a very small proportion of funds will genuinely outperform on a properly cost- and risk-adjusted basis.
But that’s not all. The evidence also shows us that any outperformance tends to be fleeting. Funds that are in the top quartile now may soon be in the bottom quartile. So identifying, in advance, a fund that will outperform in the long run is extremely difficult.
When you choose to invest for the long term in low-cost index funds you can rest assured that you no longer have to worry about the Spot the Dog list. Of course, you won’t own a headline-grabbing outperformer either, but that’s not the point. Because you’ll be paying substantially less than investors in active funds, as well as avoiding the sometimes chronic underperformance the Spot the Dog list highlights, you should receive substantially higher than average returns over the long term.
Patience and discipline are essential
Yes, as a passive investor, you do need to be patient, stay disciplined and remain invested, but so do active investors. Indeed, as recent research by Morningstar shows, passive investors were more disciplined than active investors in the ten-year period to the end of December 2023, at least in the United States.
In short, if you have a fund, or indeed more than one, on the Spot the Dog list, see it as a learning experience. Lagging the benchmark by large amounts and for long periods is part of the additional risk you take when you use an active fund. It is, however, a type of risk you don’t need to take at all.
Low-cost, passive, evidence-based investing really is a far more rational strategy.
LET’S TALK
Are you currently using actively managed funds to invest? If you are, you’re probably achieving sub-optimal returns, and you should speak to a financial adviser about simpler, cheaper, better alternatives.
Why not book a discovery session with rockwealth Edinburgh’s David Bowen and find out how switching to an evidence-based investment strategy is likely to deliver better outcomes.
Make contact with David here.
IFA and Financial Adviser in Edinburgh
rockwealth Edinburgh is an evidence-based and fixed-fee Independent Financial Adviser situated in Edinburgh, Scotland.About Us: Located in the historic heart of Edinburgh, rockwealth Edinburgh is your committed local financial planning firm. We provide a wide range of financial services, including personalised financial advice, detailed pension and retirement planning, investment strategies, and inheritance tax planning, all designed to support your financial journey in Edinburgh and across the wider region.
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