Fundsmith Equity Fund Performance Review: £54bn Stuck in Underperforming Funds
Investors in the UK equity investment market have faced a challenging period with 137 funds being labelled as underperformers by Bestinvest. These funds, which have consistently failed to meet their market benchmark over the last three years, have left £53.4bn of investor cash trapped in underperforming assets.
The latest report from Bestinvest sheds light on the persistent underperformance of these funds, leading to them being dubbed as the ‘doghouse’. While this quarter saw a nine per cent decrease in the number of underperforming funds compared to March, the total assets tied up in these funds decreased by 44 per cent from £95.3bn.
One notable fund that managed to escape the doghouse this quarter was the £24bn Fundsmith Equity fund, which had been previously condemned to underperformance. Additionally, other significant funds like the £7.7bn SJP International Equity fund and the £3.2bn Lindsell Train UK Equity fund also saw improvements in their performance.
Funds are designated to the doghouse when they consistently fail to match their benchmark for three consecutive years and underperform by five per cent or more over the entire period. The largest fund currently in the doghouse is St James’s Place’s Global Quality Fund, with £10.7bn in assets under management and a 27 per cent underperformance against its benchmark over the last three years.
Large funds, each exceeding £1bn in size, account for a significant portion of the assets in underperforming funds, totaling £26.8bn. Notably, sustainable funds make up a fifth of all poorly performing funds, driven by the unexpected surge in oil and gas prices following post-pandemic supply chain pressures in 2021.
The report also highlights the performance of global equity funds, with 44 of them being flagged as underperformers. This number, although lower than the 51 at the beginning of the year, indicates ongoing challenges for global fund managers not fully aligned with dominant market sectors.
Jason Hollands, managing director of Bestinvest, commented on the struggles faced by global fund managers, stating, “When you consider the Magnificent seven now represents a third of the US S&P 500 Index by market capitalisation and 22 per cent of the MSCI World Index, it helps to explain why global fund managers not fully weighted to this extremely concentrated band of influential stocks struggled to consistently beat the markets.”
In the UK equity space, 44 funds were identified as underperformers, representing a notable increase from the 12 listed last year. Hollands emphasized the importance of investors identifying whether a fund’s challenges are short-term issues or more deep-rooted problems with long-term implications.
The report also highlights the worst-performing funds, showcasing the impact of underperformance on investors. Funds like the Artemis Positive Future Fund, Baillie Gifford Global Discovery Fund, and FTF Martin Currie Japan Equity have all experienced significant declines in value and underperformed their benchmarks by substantial margins.
As investors navigate the complex landscape of underperforming funds, it becomes crucial to assess the underlying reasons for a fund’s struggles. Whether due to poor decision-making, market trends, or structural issues within the fund, understanding these factors is essential for making informed investment decisions.
The Impact of Market Trends on Fund Performance
The performance of equity funds is heavily influenced by market trends, with the recent surge in oil and gas prices playing a significant role in shaping fund performance. Sustainable funds, in particular, have faced challenges as a result of these unexpected market dynamics.
Over the past three years, the MSCI World Energy Index delivered a total return of 98 per cent, outperforming the MSCI World Index return of 28 per cent and the MSCI Global Alternative Energy Index decline of 38 per cent. This disparity underscores the impact of sector-specific trends on fund performance.
Challenges Faced by Global Equity Funds
Global equity funds have grappled with their fair share of challenges, with 44 funds being identified as underperformers in the recent report. While this number has decreased from the beginning of the year, it highlights the ongoing struggles faced by fund managers in the global equity space.
The dominance of a few key players in the market, such as the Magnificent seven representing a significant portion of major indices, poses challenges for fund managers not fully aligned with these influential stocks. Navigating this concentrated market landscape requires strategic decision-making and a deep understanding of market dynamics.
In conclusion, the performance review of equity funds in the UK market underscores the importance of monitoring fund performance and understanding the underlying factors driving underperformance. With a sizable amount of investor cash tied up in underperforming funds, investors must conduct thorough due diligence and seek expert guidance to make informed investment decisions. By staying abreast of market trends and fund performance metrics, investors can navigate the complexities of the equity market and optimize their investment portfolios for long-term success.