Woke funds have gone to the dogs: Bestinvest reveals ESG has fallen behind for investors

Investors were sold the idea of principled investing on the basis that it wasn’t just good for society and the planet, but would boost their returns too.

However, things have not quite paid off in recent years and the ESG boom has turned to slump, with platform Bestinvest revealing sustainability and ethics focused investment funds made up a quarter of its latest Spot the Dog list of underperformers.

But while environmental, social, and governance funds, aka ESG, took a large chunk of the unwanted honour, it was global equity funds that made up the largest slice of the list, with these funds constituting 44 of the 137 ‘dog funds’.

The latest report indicates that 137 funds have gone to the dogs, the same number as six months ago, but the wealth held in dog funds has surged 26 per cent to £67.44billion, from £53.42billion in its last edition.

Twice a year, Bestinvest names and shames the investment funds that are consistently underperforming. Its ‘Spot the Dog’ report reveals which funds belong in the doghouse and which have exceeded expectations.

This year’s report highlights a large number of global funds but these have suffered if managers have opted not to fully back the soaraway Magnificent Seven tech stocks, which dominate the world stock market index. 

ESG funds, those with responsible, sustainable and ethical, as well as impact investing focuses, saw their performances flag as a result of the rise in value of oil and gas stocks, as well as the poor performance of renewables in recent years.

Bestinvest says this is a trend that it has seen over the past few editions of the report, meanwhile investors have been increasingly put off by accusations of greenwashing in ESG funds.

The worst performing fund on the list, Artermis Positive Future Fund, lagged 63 per cent over the past three years.

The fund aims to invest in companies that make a positive environmental or ethical impact.

Meanwhile, the Aegon Sustainable Equity, L&G Future World Sustainable UK Equity Focus, FP WHEB Sustainability Impact, AXA ACT People & Planet Equity and AXA ACT Framlington Clean Economy all found themselves among the ten worst performing funds, each underperformed by more than 40 per cent over the past three years.

Aegon’s fund underperformed by 49 per cent, while L&G’s lagged 47 per cent over the period.

Jason Hollands, managing director at Bestinvest, said: ‘The financial markets have been unsympathetic to funds with ESG properties in recent years in part because of soaring energy prices but also owing to negative returns from alternative energy shares both in 2023 and 2024.

‘Over the three-year period covered in our latest report, the MSCI World Energy Index delivered a total return in GBP of 71.3 per cent, well ahead of the MSCI AC World Index total return of 28.6 per cent.

In comparison, the MSCI Global Alternative Energy Index declined 48.8 per cent over the same period.

This, Hollands said, highlights ‘why managers focused on green energy may have faced some challenges.’

However, he added: ‘We also cannot ignore the tearaway performance of names such as Nvidia, the microchip maker, Alphabet (which owns Google) and other US giants such as Amazon, Meta Platforms (owner of Facebook) and Microsoft. 

Along with Tesla and Apple, this narrow band of stocks earned the moniker the ‘Magnificent Seven’.

‘While this unique club may have lost some of their lustre more recently, they contributed to AI Frenzy at the end of 2023 and early 2024 that helped to propel the US stock market and global equities.’

Thes urge seen by the Magnificent Seven in recent years means that global equity funds have also taken a significant hit in performance.

Those in the list of dog funds currently hold some £35.16billion of wealth.

Baillie Gifford’s Global Discovery Fund was the second worst performer, underperforming the benchmark by 56 per cent over the past three years.

The worst performing sector in relation to its size, however, was the UK Smaller Companies sector.

Best invest said 11 funds made it into the list, accounting for 28 per cent of the sector.

How does a fund become a dog?

Funds don’t always perform well in the short term – there are a number of reasons why this might be the case.

A poor spell doesn’t automatically qualify a fund for the dog label, however, with he list instead intended to flag those with longer-running issues.

To be considered a dog, a fund must have failed to beat its benchmark index for three consecutive 12-month periods, indicating that they have consistently underperformed.

Bestinvest said the fund must also underperform its benchmark by 5 per cent or more over the period.

‘Actively managed funds can underperform for a variety of reasons – from a run of bad luck to instability in the team or simply bad decision making,’ Hollands said, ‘So, investors should endeavour to find managers with the right skills to deliver superior long-term returns. This is imperative to justify paying the fees to be invested in those funds.’

The list tracks only funds that are open to retail investors.

What to do with your savings if they’re in a dog fund

The ‘Spot the Dog’ report, Bestinvest makes clear, is not a list of funds that investors should automatically sell.

Poor performance, it says, ‘can come down to poor decision making, it can also be because a style and strategy that has worked well over the longer term has fallen out of step with more recent market trends.’

Hollands said: ‘A fund with a style or process out of kilter with recent market trends may also be adversely impacted. This is why identifying whether a fund is struggling with short-term challenges or more deep-rooted issues with long-term consequences is vital for investors considering whether to remove an investment from their portfolio.’

However, the global economy has had a rough time in recent years, so recent fund performance could be put down to this.

It is worth noting that many experts track fund performance over five-to-10-year periods.