Managers of popular equity income funds have taken more than £3.5bn in charges over the past five years.But in that same time, the average investor has made just £2.70 profit on a £1,000 investment.
Some £43bn of your money is held by the biggest 20 funds alone and they are often at the heart of investors' portfolios.
Equity income funds aim to grow your money while providing regular income. They do this by buying shares in mainly big, stable UK firms which pay attractive dividends.
Most of these giant funds have failed to beat the FTSE All Share index over one, two, three and five years on average, according to data analysts Morningstar.
Invesco Perpetual's Neil Woodford, who runs more than £18bn in the firm's High Income and Income fund, is one of several high-profile names to have come unstuck.
Over the past two years, his funds have been ranked 89th and 90th respectively out of 92 funds in the sector. While they have grown by 25.8% and 25.5% respectively, this is less than half the 63% growth in the FTSE All Share over the same period.
One of the main drags on performance has been his heavy investment in pharmaceutical giants such as AstraZeneca.
In a telephone conference yesterday, Mr Woodford said pharmaceutical companies represented the best investment opportunity since the technology crash at the turn of the Millennium.
Revealed: How big equity income funds have fared
Another favourite, Jupiter's £2.5bn Income trust run by Anthony Nutt, has performed woefully for the past five years.
Two of its biggest holdings are state-backed Lloyds, which is currently banned from paying dividends, and BP, which halved in value and was forced to suspend its dividend after the Gulf of Mexico oil spill last year.
But Mr Nutt says his biggest mistake was investing heavily in the media sector, specifically Yell, which publishes the Yellow Pages. If you'd invested £1,000 a year ago, you would have lost £24.50, while you would have made a £56 profit in the FTSE All Share.
Mr Nutt says: 'My track record over the longer term has been very strong relative to the market.'
Why are the funds performing badly - and will this change?
Mark Dampier, head of research at financial adviser Hargreaves Lansdown, says their poor performance is mainly down to these funds largely steering clear of commodities, such as oil and gas, with BP being a notable exception.
Mining and oil companies make up around 30% of the FTSE 100 and their share prices have risen strongly as oil and gold prices have soared.
Yet because these firms tend not to pay dividends, they have been largely shunned by equity income funds.
Mr Dampier says: 'If you strip out commodities, you're left with very flat stock market performance.'
These multi-billion-pound funds have also missed out on the rally in smaller companies. The average smaller companies fund produced a 24.8% profit for investors last year.
Unfortunately many equity income funds are simply too big to invest in smaller companies because the company would have a negligible effect on their performance.
Darius McDermott, managing director of financial adviser Chelsea Financial Services, says equity income funds have been hit by a 'perfect storm'.
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Most were heavily exposed to banks — traditionally strong dividend payers — which stopped paying dividends. Investors were also hit hard by BP's oil spill. Schroder Income — the worst performing equity income fund over the last year — counts BP among its biggest holdings.
Be patient and reinvest dividends for long-term success
But experts urge investors to be patient. Reinvesting dividends is a proven strategy, accounting for two-thirds of profits over the long term.
If you invested £1,000 in the FTSE All Share 20 years ago, you'd have made a profit of around £1,571 from growth alone.
But by earning and reinvesting dividends, that profit would have soared to £4,178.
Neil Woodford was criticised during the technology boom in the late Nineties for shunning technology stocks and preferring tobacco companies. But when the dot.com bubble burst in 2000, his strategy was vindicated.
Someone who had invested £10,000 in High Income when it launched in 1988 would now be sitting on just under £150,000. And despite cuts in dividends, equity income funds are typically paying 4% to 5% income a year.
Fund managers have enjoyed a bumper increase in fees from our pensions and investments, while offering scant returns to investors.
A damning report from charity FairPensions found that while returns on pensions collapsed to 1.1% per year between 2002 and 2007, payments to middlemen (such as fund managers and consultants) rose by more than 50%.
The report highlights the stark difference in the fortunes of the so-called experts responsible for managing our savings and the millions of pension savers in the UK.
It accuses fund managers of putting investors at risk by trying to make short-term profits, instead of making sensible investments for the long term.
Christine Berry, author of the report, says: 'People must be asking whether or not those managing pensions have savers' best interests at heart.' Separate analysis from consultants Lane Clark & Peacock found that last year a fund manager who posted returns 2% lower than the stock market could still expect a 20% increase in fees.
Typical funds levy a total annual charge of just under 1.7%, but some are almost twice this. Pensions, particularly older contracts, can be even more expensive, with some savers seeing their first year's contributions disappear in charges.
The report calls on the Government to introduce tougher rules to ensure all consumers are fully-protected from reckless or self-interested behaviour by those who manage their money.
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