Popular funds that failed in 2017 – and why you shouldn't sell them (yet)

These funds fell at some hurdles last year, but don't ditch them yet Credit:  Alan Crowhurst

Last year was highly unusual in that all major assets – from shares to bonds, commodities and property – recorded increases in value.

But many professional fund managers failed to generate market-beating returns, and some even lost their clients money.

But that shouldn't necessarily be a signal to sell. Many portfolio managers  follow trends which may take several years to prove themselves. Others may have suffered an identifiable blip from which they can recover.

But 2017 is likely to have highlighted another particular type of loser: fund managers who underperformed the stock market because they reduced their exposure to certain shares or sectors, aiming to protect against market falls.

We asked a number of professional fund analysts which of 2017's under-performers they were still prepared to back in 2018 and beyond.

First State Global Listed Infrastructure

This £2.6bn giant fund invests in companies that fund various infrastructure projects, including National Grid, Dominion Energy and American power company PG&E Corporation. It was in the bottom 10pc of its peer group by performance for the year, returning 8.2pc.

Ben Yearsley, of financial planners Shore Financial, said the fund primarily offers stability rather than aiming for the highest returns.

“This fund has now reached its 10-year anniversary with the same manager, the excellent Peter Meany.

“It is possibly seen as dull and boring, but the manager thinks it can carry on compounding at 7-10pc a year for the medium to long term.”

Schroder Recovery

Funds that invest in “value” stocks underperformed last year. Value stocks are typically out of favour and so are inexpensive relative to the future earnings they offer. As Brian Dennehy of Fund Expert said, "value" describes stocks that “are cheap but without good reason”.

These stocks surged at the end of 2016, and helped the £1.1bn Schroder Recovery fund return 31pc – a whopping 20pc more than the FTSE 100 index.

However, last year's performance was lacklustre and it was a bottom performer among its peers, returning 7.5pc compared to 13.8pc for its peer group.

Mr Dennehy said: “I think this is a fantastic opportunity to buy an outstanding portfolio of UK value stocks.”

JPM Emerging Markets Income

Emerging markets saw a similar story to value stocks, having a stellar 2016 before lagging last year.

In 2016 the JPM Emerging Markets Income fund performed 17pc better than the top performer of 2017, Baillie Gifford Emerging Markets.

However, the returns last year were more than 20pc lower than Baillie Gifford.

Mr Dennehy said: “Not only are emerging markets relatively good value compared to developed markets, but the ‘value’ sectors in emerging markets look even better value.

“I believe there will be a switch back – I don’t know when, but you must tuck away this emerging market value fund.”

Another option in this area, that has seen similar fortunes to the JPM Emerging Markets Income fund  is M&G Global Emerging Markets, said Mr Dennehy.

Troy Trojan

The £4.4bn Troy Trojan fund invests across a range of different investments from British and overseas shares to gold and bonds. Rather than pegging its returns to a stock market index, it instead aims to deliver a “real return” - so above inflation - in capital and income over the long term.

It has achieved that goal, returning 4pc last year, when inflation peaked at 3.1pc.

Mr Yearsley said: “Looking at a fund against its sector peer group is useless if you don’t know what a fund is trying to do. Sebastian Lyon is an excellent manager. If there is a market correction, this fund will shoot up the tables.”

Schroder US Mid Cap

The tax cuts in America are already having positive effects on some companies' share prices.

Nathan Sweeney, senior investment manager at asset manager Architas, said Donald Trump's key policy will free up cash for many businesses.

“Companies will receive a windfall from tax cuts that they will use to buy back their own stock, spend on acquisitions and increase wages, which could further extend the global economic cycle that got underway in 2017,” he said.

Schroder US Mid Cap, which invests in medium-sized companies but had a poor 2017, is one fund likely to profit, said Mr Sweeney: “This is likely to benefit medium-sized companies as large companies go on a spending spree. Schroder US Mid Cap could do better this year as a result.”

“Tax cuts are likely to benefit domestically focused medium-sized companies the most, as these companies do not benefit from having any offshore shelter to avoid or reduce the tax they pay like many of the large tech companies in the US,” he added.

Majedie UK Equity

Another area to face Donald Trump’s reforms is the banking sector, which could benefit from deregulation.

Majedie UK Equity lagged its peers in 2017, returning 6pc, compared to almost 14pc for its peer group. While the fund invests predominantly in UK stocks, it can invest up to 20pc in overseas shares. It holds a number of banks and other financial stocks.

Mr Sweeney thinks the fund will benefit from some of America's tax breaks and deregulation, while on home soil it will profit from rising interest rates.

“Together with Donald Trump’s deregulation of the banking sector, as well as rising interest rates, we think financials are well placed to benefit. This would support the likes of Majedie UK Equity, which has exposure to globally positioned financial stocks,” he said.

“Broader global growth during 2018 would also benefit Majedie given their mining holdings.”

Threadneedle UK Equity Alpha Income

The peer group of funds investing in UK income stocks includes some well-known names, including Neil Woodford (see below).

The Threadneedle UK Equity Alpha Income fund came near the bottom among the peer group in terms of performance last year, returning just 3pc when the FTSE 100 rose 12pc and the FTSE All Share index rose 13pc.

As Mr Yearsley explained: “About two-thirds of the portfolio is in companies that get much of their earnings from overseas. About a third is in domestically-orientated names, and many of these have been holding the fund back.”

He said fund manager Richard Colwell was “underused and under-rated”.

The Woodford conundrum

Veteran money manager Neil Woodford suffered a slew of bad press in 2017 with several of his biggest investment bets going seriously wrong. This led to a number of high-profile client defections.

Respected “multi-manager” John Chatfeild-Roberts, of Jupiter Asset Management, has invested with Woodford for the past two decades in his Merlin fund range, but last year withdrew almost £1bn from Neil Woodford’s Income fund. He did not comment on the reasons, but simply moved the money to rival firm Evenlode.

He was not alone, as Aviva, one of the largest savings providers in Britain, also dropped the equity income fund from its investment range. It cut the fund as an option for those investing via company pension schemes, leading to a £30m withdrawal of money.

Respected fund commenter Mark Dampier, of Hargreaves Lansdown, is one of a number of analysts remaining faithful to Woodford. He argues that Woodford has had periods of poor performance before, from which he has then recovered.

The fund remains on the Telegraph 25 list of preferred funds.