Failing fund? How to tell if it’s time to sell
How long should you put up with poor returns before you throw in the towel, asks Jonathan Jones
Buying a new fund is easy compared with knowing when to cut your losses. But how long should you back a losing horse before you sell? If you have ever been given investment advice, the chances are you were told to be patient and think about the long term. For the most part this is sound: funds can go through smooth and rough patches for various reasons and investors should have the patience to weather bad times to prosper during the good.
But even the most loyal investor has to throw in the towel at some point.
One cause of concern for many investors now is star manager Neil Woodford. He rose to fame during a long and successful career at Invesco Perpetual, the investment firm, where he ran some of the largest UK income funds. He left Invesco to start his eponymous fund group and his flagship portfolio, the Woodford Equity Income fund, opened for business in June 2014.
However, the fund has been the third-worst performer among funds that invest in British shares over the past three years, losing 9.3pc. More concerning is the consistency of underperformance. The fund has been in the bottom 25pc of all UK funds in 2016, 2017 and 2018.
Like others, Mr Woodford has over the past 18 months or so predicted that a significant downturn would scupper the tech stocks favoured by many rivals and simultaneously boost the unloved holdings he favours. This has yet to happen, although the fund’s performance relative to rivals has picked up in recent months as the market has wobbled.
He is by no means the only manager going through a difficult period. The table shows all the funds in the bottom 25pc of UK portfolios in each of the three most recent calendar years.
But is three years enough time to judge a fund manager in the context of long-term investing? Telegraph Money spoke to several professional “fund pickers” to discover when they would decide to pull the plug on a particular fund.
Rob Burdett, co-head of the multi-manager team at BMO Asset Management, said the reason for any sale should be linked to the reasons for the purchase in the first place. Investors “owe it to themselves” to be as informed as possible before they buy a fund, he said. Finding out the objectives of the fund, beyond the usual marketing jargon, is extremely important: it will allow you to work out why a fund might underperform later on, he added.
There are a number of reasons, some good and some bad, why a fund might underperform for a time. Acceptable reasons include the manager’s investment style being out of favour or their decision to hold more cash in expectation of a recession. However, if it is down to bad stock selection, this is not a good sign.
Mr Burdett said knowing a fund well before you bought should stop you making the cardinal sin of selling at the bottom and buying at the top.
“It is human nature when things go wrong to question our decision in the first place,” he said. Not being sure why you bought originally can compound the problem.
However, there are certain things investors can look for to ensure they are selling for the right reasons.
One is to check if the portfolio is being managed in the same way as it was when you bought it. Key signs are changes of manager, culture or the number of holdings in the fund.
In 2009, Liontrust First Income fund (now called Liontrust Global Income) was run by Jeremy Lang and went from being worth £100m to more than £1bn. Over this period the fund invested in more companies as more money came in.
“It altered the characteristics of the fund and we sold out. Eventually it went on to underperform,” Mr Burdett said.
Another thing to look for is “tracking error”, which can be found on a fund’s fact sheet, usually available online. This measures how different the fund’s performance is from that of its benchmark. The higher the number, the more “active” a fund is. If the number is shrinking without explanation, this can be a sign that the way the fund is being run is changing.
Bambos Hambi of Aberdeen
Invesco UK Strategic Income (UK) Janus Henderson UK Equity Income & Growth Jupiter UK Growth Woodford Equity Income Premier Income Premier Monthly Income Premier Optimum Income Quilter Investors UK Equity Income II Santander Equity Income Schroder UK Alpha Income Slater Income
‘Every manager is going to go through a rough patch’
Star manager Neil Woodford’s Equity Income fund has lost 9.3pc in the last three years