How long should you leave an underperforming fund?

19 July 2018

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Question by Richard

Can you advise me if there is an average number of funds that one should ideally hold? I have in excess of 20 covering the UK, Europe, Asia and the US, small and large companies etc. I am happy with my portfolio and coverage, but wonder if I have too many funds. The second part to the question is how long should you leave an underperforming fund? I have 6 months in mind. I do appreciate that funds are for the long term and in my case I am looking at 10 years plus, but if after 6 months fund A is giving me 15 % and fund B 1 % for example; then I would be looking to close down fund B, and move the monies to fund A. Is my thinking correct here? I ask because I don't like looking at them all the time, just every few weeks to see how they are trotting along.

Answered by Holly Mackay

That’s a hard question. Here goes!

There’s no rule, but I would say that about 12-20 funds is sensible. But make sure these are diversified in terms of geography, and what they do. No point in having 20 UK equity funds – that’s technically known as a bugger’s muddle and doesn’t achieve much – you’d be better off with one low-cost FTSE All Share tracker fund.

Now to the underperformers. This is very hard, but leaving them 6 months is not enough.

There are two key reasons that we see things as underperforming – speaking as an investor here, not as an economic analyst! The first is that we have a natural tendency to compare things to the FTSE 100. I once sold the Fidelity India fund because it fell by about 20% or 30% over two years, and the FTSE was doing really well. Of course the next year political reform kicked in, and the Indian market went up by about 40%! So be clear in your mind about whether underperformance is because you hold a global mix, and some markets are just out of favour. Trying to pick the best performing market is an impossible game, so holding onto a well diversified mix is the only sensible approach. It sounds as though you have a good mix of regions, as well as bigger and smaller companies – so that’s good.

Now to funds where you see a lot of red, and everyone else seems to be green.

Why is Fund B giving you only 1% compared to Fund A's 15%, if they are investing in the same region and asset type? Woodford’s Equity Income is a good example at the moment. He’s had a shocking 2 years, and backed lots of firms which have announced some unwelcome surprises. However the 2 year period before that, he did pretty well compared to the FTSE All Share. I don’t believe that we can write someone off with the track record he has – you don’t just ‘lose it’ overnight. OK, so he’s made some bad calls, but he has different opinions to many which is another sort of diversification. He thinks China is going to come a cropper and has positioned his portfolios accordingly. So he could do very well if China starts to melt, whilst everyone else bleeds.

However at times we do end up with funds that are not doing well and we should make a change – and hence ignore the usual industry advice to hold on to funds and not chop and change. I held the Aberdeen Emerging Markets Equity fund about 4 years ago and I got fed up, traded it in for the JP Morgan Emerging Markets Investment Trust, and I’m very glad I did. Its performance wasn’t up to scratch and I couldn’t see an obvious reason why.

I know this is not a black and white answer, and your question is hard.

I would make sure that you try to understand why the fund is not doing so well – is it because the manager is sticking to their guns, and taking a contrarian stance which sounds reasonable in its logic? Or are they just being a bit limp!? I would read up on the qualitative research from groups such as Trustnet or Hargreaves Lansdown. If the numbers are a bit off, but the analysts who look at the managers still rate them and their processes, I think jumping ship every 6 months is a bad idea. That said, if you’ve picked a turkey and there’s no decent explanation for said ‘turkiness’ (!?) then a considered move is on the cards.

You shouldn’t need to look at a fund portfolio every few weeks – every 6 months just to check all is in order should be enough.

Fiddling isn’t often a very good idea with investments.

Answered by

Holly Mackay

Founder and CEO of Boring Money

I’ve worked in investment markets for over 20 years. I started out at Merrill Lynch Investment Management and worked at a few big names before setting up my first business in 2008.