When you’re in the investments game, you win some and you lose some. But the question of when to sell an underperforming fund is one of the hardest to answer. Recently, this question has come up time and again, as one of the most popular funds on the market – run by Neil Woodford, the male Beyoncé of fund management – has plummeted 17% in just 12 months.
UK income funds across the board have had an awful time as Brexit has rumbled on. Woodford has had the worst time. At the same time, by contrast, the big US tech firms have been having a party, shouting “whoopeeee” and going gangbusters. Here’s the problem. Any investor should be a bit worried if all of their funds are doing brilliantly at the same time. Because trends come and go, and that’s why we diversify. And all those global share funds across the board that we’re loving? Hmm… You might think you are diversified because you own 10 different global funds, but what if 5% of all of these funds is in Apple, Microsoft, and Amazon?
At some point I suspect we’ll see a shift, and all those big global giants which we probably all hold far too much of, will have their day in the doghouse.
Take Apple. Most people who could ever afford a smartphone, have a smartphone. It’s now a replacement market, not a growth market. At some point, the growth worm will nibble this Apple. A modern media-fuelled tragedy? There’s a modern twist at play with Woodford and the like which
I find more interesting than endless speculation about his performance. The impact of the media. When he launched 5 years ago, his high profile took him high. But today the media has turned, and they have become as much of the problem as his performance, because this barrage of negativity creates a structural problem Why? Well, the regulator wants fund managers to have the ability to pay up if investors want to bail. So lots of funds are not allowed to have more than 10% of their money in unlisted shares, which take time to sell. Woodford has had to adopt some cute strategies to stay within the rules. But at the same time, after every negative article, there’s a stampede for the doors. And when people want their money back, you need to sell shares to get cash to pay out. The last thing I want as an investor is for my fund manager to be a forced seller, especially of unlisted stuff, some of which will be about to float or potentially be acquired.
The thing is, underperforming funds like Woodford’s could have their future day in the sun. Or they might have just picked rubbish companies. The actual truth is that no-one knows what the future holds. So if someone claims to know the definitive answer to ‘sell or not sell’, plug up your ears. The future is yet to be seen.
By Holly Mackay, CEO of financial guidance website Boring Money