Find the Dog: a total of 67 billion pounds in performing funds were exposed

On average, 137 funds underperformed their benchmark, according to BestInvest's Spot the Dog report

What money is kept in the dog house?

The last few years have not been easy for active fund managers. Because of the dominance of a few Big Tech stocks in the market, it is more challenging to outperform the benchmark.

Given this, passive exchange-traded funds (ETFs) remain one of the most well-liked options for investors seeking comparable performance at lower fees.

137 active funds that are accessible to UK investors have continuously underperformed their benchmark over the last three years, according to the most recent Spot the Dog report from investment firm Bestinvest. This amounts to assets under management worth over 67 billion.

Bestinvest reports that the amount of wealth represented by these "misbehaving mutts" has increased by 26%, from 53.4 billion to 67.4 billion, even though the number of funds that made the list in this biannual edition of the report is the same as it was six months ago.

Global equity funds make up about one-third of the listed funds, whereas impact, ethical, sustainable, and responsible funds make up about 25%. While the former has faced difficulties due to the tech sector's explosive growth, the latter has been plagued by rising interest rates and energy costs.

Is your money in the doghouse?

In order for the funds to be included in the Spot the Dog list, their underperformance must be consistent over three consecutive 12-month periods. Additionally, they must have underperformed the benchmark by at least 5% over the course of the entire three-year period.

The funds on the list are mostly invested in stocks.

Although everyone has their day, sustainable funds are currently not popular.

A lot of investors wish to create a portfolio that aligns with their moral principles, and in the last ten years, sustainable investing has gained a lot of attention. Investors wishing to fund the shift to a greener economy now have more options thanks to net zero targets.

However, as a result of Russia's 2022 invasion of Ukraine, many sustainable funds have been penalized for their poor performance in recent years. Oil and gas stocks have performed better since then due to the sharp increase in energy prices. These investments are generally not included in sustainable funds.

Moreover, firms that concentrate on renewable energy tend to be highly capital-intensive, which allows them to perform poorly during periods of the economic cycle when interest rates are high. In 2022 and 2023, central banks worldwide increased interest rates in an effort to combat inflation, and rates are still high today.

"The recent surge in energy prices, as well as the negative returns from alternative energy shares in 2023 and 2024, contributed to the financial markets' lack of empathy for funds with ESG properties," stated Jason Hollands, managing director at Bestinvest.

"The MSCI World Energy Index generated a total return in GBP of 71.3 percent during the three-year period covered in our most recent report, significantly surpassing the MSCI AC World Index's total return of 28.6 percent," he continued.

The situation is completely different when compared to the alternative and renewable energy market, which lost favor during the post-pandemic spike in energy demand. Over the same three years, the MSCI Global Alternative Energy Index fell 48.8%, which sheds light on the potential difficulties faced by managers who prioritized green energy.

It's possible that sustainable funds will regain their popularity in the future when interest rates and energy prices decline, as their poor performance is mostly a result of the current macroeconomic environment. Every dog has its day, as they say. That being said, the sector is unlikely to have a bright future given Donald Trump's victory in the US election and his "drill baby, drill" policy.

Due to Big Tech's superior performance, active managers are now pursuing them.

US tech stocks have performed brilliantly in recent years, despite a lurch in January when the Chinese chatbot DeepSeek disrupted markets.

Together, the Magnificent Seven tech companiesNvidia, Microsoft, Apple, Meta, Amazon, Alphabet, and Teslamake up about one-third of the market weight of the S&P 500 index. From about a fifth at the beginning of 2023, this is an increase. Specifically, Nvidia, the stock market's darling, has produced returns never seen before. As of this writing, the share price of the chipmaker has increased by about 1,800 percent in the last five years.

Even though this carries a significant amount of concentration risk, investors who have exposure to the group have welcomed the news. has a lower positive impact on active managers, however.

Star fund manager Terry Smith cited this phenomenon in a letter to shareholders at the beginning of the year to explain why his flagship product, Fundsmith Equity, had underperformed. "Some but not all of these stocks are owned by our fund, and it was challenging to perform even just as well as the index unless you owned them at least according to their index weighting," he stated.

It is important to note that, despite its previous appearances, Fundsmith Equity is not included in this edition of the Spot the Dog report. Of course, active fund managers who have less exposure to the technology sector may be justified if investors determine that the stocks have reached their peak and the industry collapses.

Laith Khalaf, head of investment analysis at AJ Bell, cautions that it would be foolish to completely eliminate exposure to the Magnificent Seven companies, considering their significance to the global stock market. But as the AI race goes on, the possibility of disruption may lessen, favoring a more deliberate, nuanced approach to investing in them.

Companies like Tesla, Nvidia, and Meta all have quite different business models, and the performance of the Magnificent Seven tech stocks is becoming more and more diversified. In light of this, it might be prudent to evaluate them individually. A passive tracker fund is unable to accomplish this; an active manager can. Just make sure your manager shares your opinions.