You have to learn to let dog funds go

Poorly performing investments should be traded in for something better, writes Abigail Montrose

A PET may be for life, but a dog fund doesn't have to be. These are funds which have consistently underperformed their peers and show little sign of improving.

While you may be loath to admit that you have made a poor investment, sometimes if there is little hope of a turnaround, the only sensible thing to do is to cut your losses and switch to another fund.

But how do you spot a dog fund? The best way to see how your fund is doing is to compare it with the performance of its benchmark (typically the All Share index for UK growth funds) and other funds in its sector. It is not enough just to look at recent performance either, you need to look at long-term performance and consistency, too.

Independent financial adviser and fund researcher, BESt Investment, looks at the performance of various investment sectors to identify poor performing funds. Funds which have underperformed their benchmark in each of the last three years and by more than 10 per cent over that period then appear on its "Funds in the Doghouse" list.

These funds may not always be at the very bottom of their sector tables, but unless there are major changes in the way they are managed, they are likely to continue being disappointing.

"If your fund has failed to match or outperform its benchmark for three years, you are in the wrong fund unless some changes are on the way," says Jonathan Spiers, managing director at BESt Investment. "To just stay with a fund on the basis it could improve is only aiming for mediocrity and that's not good enough."

But this does not mean that if the fund you are invested in appears on a dog list you you should automatically decide to cut your losses. League tables need to be handled with care, says Ian Millward, investment marketing manager at independent financial advisers Chase de Vere.

"You have to be careful about what criteria they use. If it's just past performance, that can be misleading because these funds may be about to turn the corner," he says.

The Newton Higher Income fund, for example, was a poor performer up until four years ago. But since then the fund has been restructured and the new fund manager has adopted a much tighter investment philosophy and the fund is now an excellent performer, points out Mr Millward.

There are, of course, costs involved with changing funds. You will have to pay the upfront charges on the new fund, but your financial adviser might well be able to negotiate a discount for you if you are transferring from one fund to another. Mr Spiers estimates that with a negotiated discount, it is unlikely to cost more than 2 per cent to switch funds.

If you do not have a financial adviser, then you will need to research the market first to decide on a new fund. Once you have decided, you can then either invest direct or via a discount broker.

BESt Investment 0171-321 0100; Chase de Vere 01225-469371; Discount broker services: PepDirect 0800-413186; Chelsea Financial Services 0171- 351 6022; Pep Shop 0115-9825105; PEPwise 0345-573277; Hargreaves Lansdown 0117-988 9880