Underperforming funds experts are happy to back

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“The way I see it, if you want the rainbow, you gotta put up with the rain” – the iconic Dolly Parton was fond of saying.

While the legendary singer and renowned philanthropist probably wasn’t referencing holding on to investments during periods of underperformance to benefit from future gains, it feels timely to quote Parton – who was also an astute businesswoman – as the world reflects on her legacy.

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The trouble with tech

There has been a clear divide in funds’ performance depending on if and when they participated in the tech rally. 

Rajiv Jain, manager of the GQG Partners Global Equity I GBP Acc (BH480T7) fund, shifted from technology to defensive and energy stocks in 2022, which paid off. But the decision to underweight technology and growth stocks in 2025 to avoid the “AI frenzy trade mania” in favour of defensive stocks with dependable earnings was not so fruitful.

“While backed by logic, the prudence wasn’t rewarded and the decision yielded weak returns while markets continued their exuberance,” says Alex Watts, senior investment analyst at interactive investor.

“After a disappointing 2025 and a mediocre 2026 so far – despite a strong first three months – the fund has seen its formerly enviable record of outperformance dampened.”

Watts is pragmatic about this blip, noting that Jain has taken a U-turn and is now revisiting technology and the hyperscalers on the back of strong margins and valuations softening to pre-2023 levels.

“Investors should appreciate that such pivots are part of the modus operandi of GQG, and the likelihood of timing such decisions in perfect alignment with broader market rotations is virtually nil.

“GQG’s value is in the deep analyst and manager resource and experience underlying these changes and a record of success at the helm of the portfolio should give some faith in the managers’ ability to outperform once more.”

On the flip side, HgCapital Trust Ord (LSE:HGT) – which provides retail investors with access to private equity firm Hg’s portfolio of software and services businesses – saw its share price hit this year due to its exposure to tech stocks as fears grew that AI will help companies create their own tools that replicate subscription-based software applications.

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However, Matt Ennion, head of fund research at Quilter Cheviot, believes the sell-off has been overly indiscriminate and is keeping faith in the fund, particularly given the trust's share price and discount, which he says already reflect the risks and present an attractive opportunity for long-term investors.

He points out: “Hg’s portfolio consists of deeply embedded, business-critical software companies with valuable data, strong customer relationships and high switching costs – characteristics that position them well to exploit AI.

“The manager has adapted its investment approach, invested heavily in AI capabilities and is already seeing measurable operational and commercial benefits across the portfolio.”

James de Bunsen, portfolio manager of the Janus Henderson Diversified Alts I Acc (BDZT626) fund, is also positive on the outlook for HgCapital Trust.

“Underlying double-digit revenue and earnings growth in Hg’s key portfolio companies are continuing to drive performance, with the potential for further discount tightening to juice up these returns,” he says.

Facing into the wind

Another holding in de Bunsen’s fund is Greencoat UK Wind (LSE:UKW), which – like other renewable energy trusts – has been hit by a whole host of setbacks in recent years, including low wind speeds, outages, regulatory changes, cost disclosure issues, higher bond yields and outflows from multi-asset fund investors. 

It’s no surprise therefore that the sector has gone from trading at double-digit premiums to languishing at substantial discounts. While Greencoat has staged somewhat of a recovery this year, the obstacles it has faced in recent years have weighted on its longer-term figures.

“It may seem harsh to label Greencoat an underperformer when it is up more than 20% year-to-date but the three- and five-year numbers are not where they should be,” de Bunsen says.

On the plus side for potential investors or those wanting to top up holdings, Greencoat shares can still be bought at a 17% discount, while offering a 9.5% yield with coverage of almost 2x earnings.

“The key question is whether those various setbacks of recent years are behind us,” de Bunsen adds.

For investment trusts overall, an exodus of wealth managers hasn’t helped either. Uncertainty over a new charging regime, which de Bunsen references below and which led to a “double counting” of investment trust costs, had eroded the appeal of trusts among fund-of-funds managers for around three years. However, in January, there was good news for trusts, as it was announced that this double counting would no longer apply.

Ongoing consolidation within the wealth management industry has only added to the pressure. Nowadays for a wealth manager to consider an investment trust, the assets need to be around £300 million for it to have a sufficient amount of liquidity.

“We believe the sell-offs by multi-asset funds is largely done, as is political meddling and the double counting of costs. Wind-speed forecasts are beyond our pay grade, but we expect power prices to remain elevated as natural gas inventories in Europe look worryingly low heading towards winter. The inflation linkage in revenues – helping protect dividend payments – also makes the shares look significantly more attractive than fixed-coupon bonds,” says de Bunsen.

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Anthony Snowden, private client investment director at Tyndall Investment Management, holds the beleaguered Gore Street Energy Storage Fund Ord (LSE:GSF), which not only has the governance issues associated with clean energy to contend with but is also facing calls from activist investor Saba for the fund to be wound up.

Renewable energy trusts sell a portion of their power directly to the wholesale market without fixed-price agreements, known as merchant revenue. The independent forecasts for the trust’s future merchant revenues have recently been reduced, which Snowden says has contributed to its disappointing performance, with its NAV falling from 102.8p to 74.9p in the year to March 2026. However, Snowden remains optimistic on the trust’s future potential.

“I continue to own it because I believe the current valuation is increasingly reflecting the governance problems rather than the underlying long-term opportunity,” he says. “Energy storage remains an important part of the transition to a more renewable electricity system, and Gore Street has a diversified portfolio of around 1GW of operational battery capacity.”

Snowden also welcomes the new board’s focus on releasing capital, selling selected assets and returning cash to shareholders.

He adds: “The introduction of activist investors makes the case more compelling. The NAV may recover, but the combination of asset sales, improved battery economics and distributions should close the gap between the market price and underlying asset value.”

Style guide

Sometimes, a fund’s investment style is simply out of favour, but if its long-term performance looks solid and investors are in it for the long haul, it stacks up to hold on to it.

Matthew Read, senior analyst at Quoted Data, says this is the case with the JPMorgan Japanese Ord (LSE:JFJ) trust.

“While the trust’s recent underperformance is disappointing, much of it reflects its investment style rather than any deterioration in the long-term outlook,” he says. “JFJ favours higher-quality growth companies, which has been a headwind as value stocks have led the Japanese market amid higher interest rates.” 

Despite the trust’s short-term weakness, Read says its longer-term record remains respectable.

“It outperformed TOPIX over one, three and 10 years to the end of March 2026, although its five-year figure is still heavily influenced by the difficult period for growth stocks in 2021-22,” he says.

“More importantly, the long-term case for Japan remains intact. The country has a stable, pro-business government; corporate reforms and improving shareholder returns continue; valuations remain reasonable; and M&A activity is strong. This looks more like a difficult period to sit through than a reason to jump ship.”