Unlike a low rate on a savings account, a poorly-performing fund can leave you with less money than you originally invested. But predicting returns can be extremely difficult.
Yet we found several funds in 'Spot the Dog' also appear on several recommended funds list, including Bestinvest's own list.
Here we reveal the platforms pushing poor funds and explain how to judge fund recommendations.
What was the worst performing fund?
The Baillie Gifford Global Discovery Fund took dreaded first place for worst performers in this Spot the Dog list. It's also on BestInvest's 'Best Funds List'.
The Spot the Dog list compiles data on all funds and works out which are performing worst compared to the index tracking all companies in that sector.
So, if you invest £100 in a fund and three years later you have £110, you'll have a 10% return - but if those investing in an index of the whole sector ended up with £140 on the same investment, it would mean your fund underperformed by 30%.
If you invested in the Baillie Gifford Global Discovery Fund, you’d have just £61 today, meaning it's lagging behind its index by a huge 70%.
The fund’s focus on smaller companies who it predicts to take off means it didn’t invest in the tech giants who led the sector’s gains, which explains part of its poor standing against the index that features these companies heavily.
But, that doesn’t entirely explain away its poor performance in absolute terms. It was one of few funds on the list actually leaving you worse off than when you invested.
Find out more:Why do Bestinvest recommend it?
Bestinvest are upfront about the Global Discovery Fund being a high risk investment as it bets big on smaller companies that it expects will grow significantly.
While taking risks and setting yourself apart from the pack has the chance to pay off in a big way, when the pack ends up being right, you can find yourself falling far behind.
Jason Hollands, managing director of corporate affairs at Bestinvest, says, ‘As we explain in the Spot the Dog report, it is compiled solely on the basis of a set of past performance statistical filters (covering a three-year period) and people should not therefore automatically assume that if a fund is in the list that it should be sold.
‘In fact, decisions to buy or sell any investment should never be taken on the basis of past performance alone as that would be akin to driving a car only looking in the [rearview] mirror and not the road ahead.
'The fund significantly outperformed wider global equity markets (which are dominated by mega-sized companies like Apple, Microsoft, Amazon, Meta and Tesla) up until the end of 2020, but these more volatile types of stocks have reacted particularly badly to rising interest rates (most of the portfolio is invested in US companies) as early-stage companies typically have higher borrowing costs to finance expansion.'
Baillie Gifford describe the fund as one investing with a five to ten year view, though even over five years this fund has produced negative returns (-4%).
Find out more:Which other platforms recommend poorly performing funds?
Charlie Musson, PR director at AJ Bell, says, 'Artemis US Select is run by an experienced manager in Cormac Weldon who has over 25 years of running US Equity strategies and has shown his ability to navigate through difficult market backdrops.
'It has been difficult for active managers to outperform the S&P 500 in recent years due to a concentrated number of technology stocks leading the index and this is something we keep under constant review in regards to the Favourite funds list.'
Barclays Smart Investor features abrdn UK Smaller Companies on their Barclays Funds List but declined to comment.
Should you trust recommended fund lists?
You shouldn't just rely on past performance as an indicator of what's to come - but you shouldn't ignore it either.
Platforms' analysts sift through the thousands of funds on offer and pick out the best in each sector. But as we've seen with the Spot the Dog report, these choices don't always work out as they'd hope.
In the instance of the Baillie Gifford Discovery Fund, for example, it's not a suitable investment with someone with low risk tolerance or shorter-term goals.
Nor will buying every fund on a list make a good overall portfolio, as it won't necessarily provide the level of risk that suits you.
Recommended fund lists can be a useful jumping off point if you have a specific gap in your portfolio - perhaps you're looking to invest in emerging markets but don't know where to start.
Make sure to read the platform's descriptions of their funds, and the fund's Key Investor Information Document (KIID), to see if they're actually right for you.
Find out more:source https://www.which.co.uk/news/article/revealed-investment-platforms-still-recommending-worst-performing-funds-aPwM98E4822A