The worst places to put your pension

These funds have delivered disastrous returns over the last few years. Don't let them destroy your pension!

If you're looking forward to making full use of your new £15,000 New ISA (‘NISA’) allowance this tax year, then be sure to do your homework first. Otherwise, your adviser (or your own research) might lead you towards a 'dog' fund instead of a 'star' manager.

British investors are wasting the best part of £20 billion in awful investment funds.

That's the findings of the latest 'Spot the Dog' report from investment adviser Bestinvest. Every six months, Bestinvest reveals the funds that have serially under-performed their market benchmarks, which it dubs 'dog' funds. To be deemed a dog, a fund must have under-performed an appropriate market or country index (such as the FTSE 100) for three years in a row. In addition, it must have fallen short of its main benchmark by 10% or more over these three years.

Fewer dog funds

The good news for British investors is that, partly thanks to rising stock markets worldwide, both the number of dog funds and the amount wasting away in them has fallen during 2014 so far.

At the start of this year, Bestinvest's January report revealed 53 dog funds containing £22.3 billion. Six months later, the latest Spot the Dog report names and shames 49 dog funds containing £19.55 billion of investors' hard-earned wealth.

Obviously, given the choice between having money in dog funds or star funds, investors would pick the stars every time. However, it's not always that easy to spot the dogs, especially when rising tides in stock markets lift all shares. In addition, a number of dog funds are run by household-name fund managers with previously hard-won reputations for their past performance.

Leading the pack for poor performance

Bestinvest's report (which you can download here) uncovers 49 funds containing £19.55 billion of investor assets. Controversially, the report 'outs' previously popular and widely-held funds that have gone from being stars to dogs.

For the second time on the trot, well-known fund-management group M&G tops the list: its three dog funds hold £10.7 billion, representing more than half (55%) of the total. In another surprise for investors, the popular Standard Life UK Smaller Companies fund - run by highly respected manager Harry Nimmo - also appears in the doghouse.

Sorry sectors

The worst-performing sector in Bestinvest's report is the Investment Management Association (IMA) Global sector. In total, this holds 20 dog funds, accounting for a sixth (16%) of this entire sector.

In the North America sector, there are eight dogs, representing 13% of all funds in this field. Then again, over a fifth of North American funds ended up dogs in the previous report, so there has been some improvement in this sector.

Here is a list of the number of dogs in each fund sector, sorted from most to fewest dogs:

As you can see, the Global equity sector seems to be a tough spot for fund managers looking to consistently outperform their benchmarks. In total, 20 out of 127 funds were in the doghouse. That's £9 billion of our money withering in these dog funds, or almost half (46%) of the total of £19.55 billion in dog funds.

Likewise, the North America and UK Smaller Companies sectors both contain eight dog funds to have bitten investors over the past three years. At the other end of the scale, these three sectors contained only three dog funds each: Global Emerging Markets, Asia Pacific and Japan. This suggests that, on the whole, fund managers are making the most of booming Far Eastern markets.

Big fund groups in the doghouse

It goes without saying that major fund managers with large fund ranges and massive assets under management are likely to appear in this report, simply because of their sheer size. Even so, no group has more than three dog funds in the latest edition, which Bestinvest sees as a positive sign.

Here is a list of the number of dogs for each major fund group, sorted from most to fewest dogs:

When ranked by asset size for dog funds, top is M&G with three dog funds containing £10.7 billion: M&G Recovery (£6.7bn), M&G Global Basics (£3.1bn) and M&G American (£0.9bn).

The worst of the worst

So which are the absolute worst of the worst dog funds? If you want to see a full breakdown by fund sector then check out the Bestinvest report, but in the table below I've highlighted the worst fund in each secto and its five-year performance against its respective benchmark (based on investing £100)

Don't rely on past performance

Always remember the wealth warning that past performance is not necessarily an indication of future performance. Indeed, today's stars could become tomorrow's dogs (and vice versa), so never be complacent when it comes to monitoring your portfolio's performance.

So be sure to check how your investments are performing on a regular basis. And if your cash is trapped in a dog fund, be sure to move it!

This article has been updated from a previous version

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