£269 billion Invested in Underperforming Funds

Are you holding onto a dud fund? New research reveals that only 70 funds out of the 750 funds with a 10 year track record consistently deliver over the long term

Emma Wall 22 October, 2013 | 11:30AM
Facebook Twitter LinkedIn

Is your pension portfolio underperforming? What about the funds in your ISA? According to new research by FundExpert.co.uk more than 91% of funds are "mediocre at best".

The research analysed 120 investment time frames for the 750 funds that have a 10 year track record - and found only 70 funds managed to return double investors' cash.

The Morningstar Rating for funds, often called the “star rating”, is a quantitative assessment of a fund's past performance - both return and risk - as measured from one to five stars. Funds are rated for up to three periods — the trailing three, five, and 10 years.

Looking at a similar investment universe as the FundExpert research, the Morningstar Rating reveals that of the funds domiciled in the UK with a 10 year history that are available to retail investors, less than 100 have been awarded five stars. 

To find funds that are likely to outperform in the future, investors can use Morningstar’s Analyst Rating, which measures just that. Top rated funds are awarded a Gold, Silver or Bronze rating by our team of analysts based on a series of criteria. 

Morningstar closed-end fund analyst Szymon Idzikowski said there are a number of factors one should analyse when investing in investment trusts and OEICs.

"Less experienced investors may focus solely on past performance; those with more experience may look into the resources behind the fund, including the skills the team brings and the process the fund manager follows," he said. "One area that is often overlooked is the fund firm, or parent—one of the five key areas alongside people, process, performance, and fees, that we believe are important to understand when predicting the likely future success of funds."

Brian Dennehy, of FundExpert.co.uk said that while it would appear the vast majority of fund managers aspire to mediocrity the latest analysis shows that many don’t even manage to achieve that.

"For many thousands of private investors that buy and hold funds for long periods of time, this means a totally unacceptable level of underperformance they shouldn’t be prepared to put up with," he said.

“We can’t change the fund management industry overnight, it is what it is.  But private investors can change their investment outcomes by taking more responsibility, and monitoring their funds in the certain knowledge that there is, in most cases, considerable room for improvement."

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Emma Wall  is former Senior International Editor for Morningstar