Fail­ing fund? How to tell if it’s time to sell

The Daily Telegraph - Your Money - - MONEY -

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

Fund

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

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