When should you ditch a fund?

Sam Slator 10/11/2022 in Basics

There are a number of potential red flags when it comes to your investment portfolio.

When you spot one, it’s time to revisit your investment decisions. Here, we look at 10 red flags, highlight what they could mean for your overall portfolio, and suggest how best to tackle them.

1. The fund manager leaving

The departure of a fund manager is a definite cause for concern. The track record of the person at the helm is one of the most important factors when it comes to fund performance – and it is vital to the first part of FundCalibre’s rating process.

But before you have a knee-jerk reaction, it’s important to find out why they’re leaving and who is taking over. Are they retiring having spent the past couple of years grooming their anointed successor or have they been given a more lucrative offer by a rival house? Has performance been wavering, and the fund house believes another person is better for the job?

You’ll need to consider the replacement and their track record. Have they got experience managing money in this area of the market? Have they delivered a comparable performance – and over how many market cycles? And do they have the same style, or will they change the way the fund invests?

When an Elite Rated fund manager leaves, the fund will generally lose its Elite Rating from FundCalibre – unless an established co-manager takes over.

2. Sudden poor performance

No-one wants to lose money, so a significant dip in the fund’s returns will understandably ring alarm bells.

The first step is finding out what’s caused the underperformance. Has it been down to poor decision making by the fund manager or are they valiantly trying to make money in a sector that’s currently unloved by the stock market? Has their style of investing gone out of favour? You should also consider whether global factors have played a part. For example, a financial crisis spreading round the world, a war, or political uncertainty within a key market.

3. Performing worse than rivals

This could be a major negative. If every fund in the sector is struggling then the chances are that the problems are down to broader issues outside of the manager’s control.

However, if they are underperforming rivals by a significant margin then further scrutiny is required to establish why this is happening. For example, is the failure temporary and due to some worse-than-expected performances by a few stocks or is the underlying reason due to a flawed investment process?

At FundCalibre, we usually give fund managers 12-18 months to turn around performance. But if they start to fail our AlphaQuest screen, the fund will lose its Elite Rating.

4. Change of investment focus

The investment philosophy of a fund dictates how it’s run. This is likely to have influenced your decision to buy into the fund in the first place.

However, if its focus suddenly changes, then you’ll need to take a closer look. Is the switch due to external conditions or an admission that the original thesis just isn’t working?

Ask yourself some questions. Is the manager sure that the new direction is correct? What has the decision been based upon and how will the overall portfolio change as a result? Are you happy that the new direction means the fund will continue to meet your investment goals?

5. Increasing redemptions

If investors are leaving the fund in their droves, you’ll need to find out why. Is there something about the fund or its manager that you’ve missed? What don’t they like about how it’s being run? Is it the performance? Has the manager made a disappointing prediction for the future? Is the investment style wrong for the current conditions?

There may well be very good reasons to stay invested – but the important factor is to ensure you’re not missing a trick.

6. Very high inflows

Conversely, money pouring into funds could also be a potential negative, so you’ll need to consider whether it’s likely to have an adverse longer-term effect.

While fund houses are usually keen to attract investor inflows, too much coming in can make it more difficult for the manager to allocate this extra cash.

In some cases, the fund may be soft or hard closed. Hard closing means no new money will be accepted. Soft closing means it will, although higher charges will make it less attractive to do so. This action is taken in the interests of shareholders – so that the manager can concentrate on managing the money successfully rather than trying to find less-than-perfect ideas to put the cash to use, which in turn could negatively impact performance.

7. Lack of communication

Do you receive little in the way of information from the fund manager, aside from the most basic of information on the monthly factsheet?

When managers fail to give updates on their decisions – especially if they’ve been through a period of poor performance – investors will get understandably concerned.

For example, does the lack of communication mean they’re unwilling to discuss
what’s gone wrong? What are you not being told – and why not?

8. Fund house being taken over

A fund group being taken over is unsettling for both its employees and investors. Consider what is likely to happen to your portfolio and its manager should this take place. Will the fund be merged with a similar portfolio from the other investment house? Is the plan to trim down the number of products on offer? How about investment styles? If your fund is from a specialist, small boutique fund house, will it maintain its philosophy in the wake of being bought by a larger rival?

9. Rebranding of a fund

The key here is finding out why a fund is being rebranded. Is the change purely to do with its name or will it affect how it operates on a day-to-day basis? What is the reason behind the move? For example, questions may be raised as to why the fund group is willing to spend money on a rebranding. You’ll need to listen to how the fund house explains what’s happening and why, then consider if the move is justified.

10. Being too stubborn

A fund manager sticking rigidly to his thesis – despite overwhelming evidence to the contrary – is definitely a red flag.

While taking a contrarian stance to rivals can be a good way to make decent returns, constant underperformance, and an unwillingness to budge on this stance may be bad news. At the very least it warrants further consideration.

You’ll have to decide whether the manager has simply got it wrong or whether they genuinely see something the stock market is missing.


Photo by Joshua Hoehne on Unsplash

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions.Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice.Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.