As we approach the tip of the yr, many investors might be grappling with the challenge of identifying why certain funds of their portfolio are underperforming. The “do I hold or sell?” conundrum will pop into their heads. But simply taking a look at the performance tables will not be the reply.
Just as many investors try and time markets by buying funds which have shot the lights out, many will sell funds just because they’ve lagged.
With a mess of options available, determining whether it’s best to trim your losses and move on or ride out the choppy waters could be a daunting task. Nevertheless, simply asking yourself the suitable questions can pave the approach to making the suitable decision. Should you judge a fund by the numbers alone, there may be every probability that you just’ll get it mistaken.
My company, Tillit, recently reviewed the funds we provide our customers, which numbered 104 on the time of review – 25 index trackers and 79 lively funds. Specializing in lively fund performance over 10 years, we found that while 82pc had performed well, around seven could potentially be dropped.
It’s essential to approach fund investing with a long-term perspective, understanding that markets will be volatile and short-term fluctuations are inevitable. Commonly reassessing your investments (say annually) and staying informed about market trends will enable you to navigate the dynamic landscape of investment with confidence.
Listed below are five key questions all investors should ask themselves once they assess the performance of their investment portfolio.
Examine historical returns
Begin by scrutinising the fund’s historical performance. While past performance provides no guarantee of future gains, it does offer a useful guide.
Look beyond recent gains or losses and evaluate how the fund has fared over the long run. Assessing a fund’s performance over various time frames provides a more comprehensive understanding of its stability and consistency. A fund that consistently lags behind its benchmark or peer group over prolonged periods could also be signalling problems.
Several web sites, similar to Trustnet and Morningstar, enable investors to do that without having to open an account.
Has the fund’s philosophy, process or manager modified?
The track record of the fund manager can provide you with crucial insight. Investigate any latest manager’s historical performance with other funds, in addition to experience investing within the regions, sectors or assets pertinent to the fund.
Check also whether the fund’s philosophy or investment process has modified. While small changes is perhaps hard to detect, a fundamental shift needs to be easy enough to unearth with somewhat online research.
For instance, we removed the Martin Currie Japan Equity fund from our funds list earlier this yr following the lead manager’s decision to retire.
The departure of a fund manager doesn’t robotically mean removal but on this case his alternative’s lack of experience managing Japanese shares, combined with a proposed change in philosophy, prompted our decision.
Is the portfolio constructed as you’ll expect?
Review the fund’s factsheet to evaluate whether it aligns together with your expectations regarding the regions, sectors and asset types the fund is invested in – in addition to the corresponding allocations.
It may be value checking if the fund holds any unconventional investment instruments (similar to derivatives or unlisted assets) that you just hadn’t expected. If anything does seem unusual, dig somewhat deeper to find out whether the fund manager has explained any deviations within the portfolio.
Monthly or quarterly comments from the manager are sometimes found on the fund’s factsheet. If not, check any related commentary on the fund’s website.
Is the fund’s strategy still relevant?
Markets continually change – and sometimes this might necessitate a change or at the very least a tweak to your investment strategy. Assess whether a fund’s original strategy stays pertinent in the present economic and market conditions.
What could have been a successful approach up to now could now prove ineffective and failure to regulate could end in underperformance.
However it would present a possibility to anticipate future changes that may result in more favourable market conditions. As an illustration, in the last decade leading as much as around 2021, so-called growth funds consistently outperformed value funds.
Since then, nevertheless, value funds have regained momentum. Growth investors typically concentrate on firms that promise strong earnings growth, while value investors consider stocks that appear undervalued relative to their market price.
Check the fees you might be paying
High fees can significantly affect your overall returns. Scrutinise the fund’s ongoing charges figure (OCF), which will be found on a fund’s factsheet or Key Investor Information Document (KIID), and compare it with similar funds. In case your fund’s fees are substantially higher without corresponding outperformance, it might be time to reconsider your investment.