The circumstances that influence a sale can be divided into two distinct categories. The first are changes that happen to individuals such as emergencies or changing personal needs.
Yet changes to the funds themselves or the fund market are also important. While the former vary enormously it is possible to develop some general rules on how to deal with the latter.
Consistently poor performance
The performance of a fund will always have its short term ups and downs but such investments should be designed for the medium to long term. But when should investors decide to sell?
Paul Barnes, an investment manager at Plan Invest, says: “If you look at the funds that are doing well right now they are the older funds.
"If you look at their records very closely there will be periods during which they don’t do particularly well. I think the question is essentially, over what period do you judge the business cycle to be so that you can fairly judge the true abilities of the manager. For me personally a fund would need to do badly consistently for three to five years.”
Michael Bakowski, a consultant at Chamberlain de Broe, says: “It is important to remember that selling the dog fund means crystallising that phenomenal loss.
"There is no right or wrong answer about whether to sell; you just have to look at the overall investor circumstances and the overall portfolio. Technology funds are not a good example of consistent dog funds because they haven’t been consistently bad. They were phenomenal for a while.”
Ongoing exceptional performance
This may seem an outlandish reason but there is sense in investigating a fund that has outperformed its peers or a category of funds that has outperformed the market.
Mark Dampier, the head of research at Hargreaves Lansdown, says there is a case for not being frightened to capture gains occasionally. “It is always very difficult but if you have tripled your money maybe you should think about taking some profit.”
Barnes agrees that investors may get caught up in the euphoria of rising share prices: “The obvious sector you bring into play is the technology one.
"I think it is sensible for people to expect that something that has doubled over a period of 12 months to halve rather than double again. A good reason to revisit your portfolio is when funds are exceeding expectations. If you had been prudent and put 5-10% in technology which had been extraordinarily successful over a short period of time such that it now represented 20% of the content of the portfolio. Then I think there is a clear case to be made for reducing that back to its 10% weighting.”
Fund manager moves
The effect of a manager’s departure varies significantly between funds. Some investment management companies dictate a house style of investing that must be closely adhered to by their managers while other firms give managers a freer rein. The influence of a single manager on a fund also depends on whether he was a key manager or worked within a team structure.
Dampier says the investment world is imperfect so there are always exceptions to the rules: “Yet generally speaking in 90% of cases if a fund manager leaves you are probably best to hold onto the fund and monitor it more carefully for the next 6-9 months or so because the new manager might do just as good or better of a job.”
He says that Hargreaves Lansdown looks at the specific circumstances when a manager leaves a fund in which it has advised its clients to invest.
When Albert Morillo left Scottish Widows to move to BlackRock it advised its clients to follow him. Hargreaves Lansdown took the view that Morillo, along with key members of his team who made the move with him, were responsible for the fund’s success.
He says that Hargreaves Lansdown looks at the specific circumstances when a manager leaves a fund in which it has advised its clients to invest.
When Albert Morillo left Scottish Widows to move to BlackRock it advised its clients to follow him. Hargreaves Lansdown took the view that Mr Morillo, along with key members of his team who made the move with him, were responsible for the fund’s success.
Yet when William Littlewood retired as the manager of the Jupiter Income fund because of ill health in May 2000, Hargreaves Lansdown decided not to recommend changes to its client portfolios. It was reassured by his replacement, Anthony Nutt, who it regarded as a top income fund manager.
Fund management groups merging
Mergers and takeovers within the financial services industry are common and may affect more than the name of the fund an investor holds. Fund ranges are often rationalised--reduced with similar funds merged--which may leave the investor with a fund that has a different objective and a new manager.
Bakowski does not like merging fund houses because if there is some uncertainty about a manager’s future because of the merger, the manager may keep an eye on appointment pages of newspapers rather than the market. He says: “This isn’t the time to go in with new money.
"With current funds, I would keep an eye on the fund and take it on a case-by-case basis, but don’t move the money away. If this suddenly means that 15 or 25% of the portfolio is with the one manager then yes we would advise them to move the money around.”
Fund size
Another trigger point is the overall size of a fund as the ideal size differs within each investment sector. If a fund grows too quickly it can be hard to maintain the original objectives and move efficiently within its market.
The portfolio mix is wrong
A portfolio is a group of funds that should be working together. While one person's portfolio may be more conservative than another’s, the contents of each portfolio should balance out rather than all pull in the same direction.
Investors should run their funds through a tool like the Morningstar Portfolio X-ray on a regular basis to see how the investments behave on an aggregate basis. As funds are added to a portfolio and investments in them increased it becomes even more important to know what is in the funds.
If a set of specialised funds covers all of the holdings in a broadly diversified fund perhaps the money in the generalist fund can be moved. Alternatively two funds that originally seemed to have different investment objectives may have shifted towards holding similar companies. In that scenario it might make sense to research both funds and sell one.
Investors should take this as a basic checklist of reasons to re-evaluate a portfolio. It does not mean that action is always necessary but monitoring the markets should provide investors with the knowledge to act when it will benefit them.
