Naturally, investors are more likely to get rid of a fund that has disappointed on either a relative or absolute basis – or both. Selling out of an underperforming fund is often an effective exercise – particularly if the manager offers no explanation for the reasons for their underperformance and shows no signs of turning things around.
Growing frustrated and selling out of a quality manager with a long-term, thought-out strategy can be very damaging, however, as was arguably the case in late 2011 when many investors gave up on Sanjeev Shah’s Fidelity Special Situations fund.
With a number of high-profile funds currently suffering bouts of significant underperformance, we felt it was a good time to give our readers the chance to seek help from industry professionals regarding the funds they are currently worried about.
Here we start with the investment trusts that are proving problematic.
RIT Capital Partners
The RIT Capital Partners trust was the most mentioned closed-ended fund by our readers, due to its relative underperformance compared with its MSCI World benchmark over one, three and five years. It has also fared poorly relative to its IT Global Growth sector.
Performance of trust vs index over 3yrs
Source: FE Analytics
Stephen Peters, analyst at Charles Stanley Direct, agrees that performance has been disappointing of late, but stresses that investors need to understand the reasons for this.
This, he says, will determine whether or not they should sell.
"You’ve got to understand where this trust is in in its cycle to make this decision," he explained.
"Historically, the trust did so well in the early 2000s because the private equity portion of the portfolio did very well. A lot of projects were realised over this period and the trust made a lot of money as a result."
Performance of trust and index over 15yrs
Source: FE Analytics
"It is currently in the early stages of its private equity cycle, and the value may not come through for a number of years. It recently made a sale of oil and gas company Agora, but most of its other projects are very much in the early stages."
"My advice would be to wait a couple of years to see if these projects come good. It’s made the bulk of its returns in the past because of its success in private equity, so I think it’s a question of waiting."
"If in a couple of years there are big disappointments relating to this, perhaps then will be the time to look elsewhere. My feeling is that it is too early at the moment."
Peters adds that investors must take in to account that the management team – dominated by the Rothschild family – is not focused on beating its benchmark year-on-year, making the trust different from many of its rivals. This is why it can afford to wait for the private equity cycle to work in its favour.
"On a more negative note, management has got a few asset-allocation decisions wrong recently, including a position in gold. I’d also point out that the trust tends to only have a 60 to 70 per cent net long position in equities, and so it’s not wholly surprising it underperforms when the market goes up steeply," he added.
Peters points to a future change in management as another potential stumbling block for investors to consider.
"[Lead manager] Jacob Rothschild is of a certain age and isn’t going to be around forever, and his son has little interest in the trust," said Peters.
"The question is: do they have the long-term quality from in and outside the family to carry on?"
"Inside the family, they are rolling out the management from out of the UK, with Baroness Ariane de Rothschild being brought in."
"Looking outside the family, I think the jury is out. They’ve bought in Ron Tabbouche from GAM who hasn’t been there for long enough to make an impact, but they lost David Haysey and Micky Breuer-Weil recently.
"There’s definitely a question mark there over management, which needs to be taken into account when looking at performance from here on in."
The £2.3bn RIT Capital Partners Trust is currently on a discount of 8.2 per cent and has ongoing charges of 1.32 per cent, excluding performance fee.
Templeton Emerging Markets
Emerging markets have been a problematic area across the board recently, thanks to their poor performance relative to their more developed counterparts. They have had a particularly poor 2013 on the back of worries over Chinese and Brazilian growth.
Performance of indices over 3yrs
Source: FE Analytics
Among investment trusts, there is no bigger name than Dr Mark Mobius’s Templeton Emerging Markets IT, which is £2bn in size.
The trust has a stellar long-term record, but performance has slowed down of late. Our data shows that it has marginally underperformed its MSCI EM benchmark over a three-year period, with returns of just over 6 per cent.
This underperformance, combined with the negative sentiment surrounding emerging markets, has prompted four of our readers to question whether Mobius’s portfolio remains a good investment.
Peters points out that the trust’s style has been out of favour for some time, and believes investors need to be more patient when buying into something as volatile as emerging markets.
However, he voices a word of warning for those buying the trust on Mobius’s name alone.
"When we meet with Mobius, he’s the first person to admit the day-to-day running of the trust now lies with Alan Lamb," he said.
"Mobius (pictured) is the figurehead and the public face of the trust, which is important, but Lamb now runs it in effect. I don’t have a strong view on Lamb, but there’s no doubt Templeton has a strong team behind it."
"The bigger issue, however, is that the trust has a value bias towards large caps, which have been out of favour compared with growth for some time. Things like Brazilian and Chinese banks and Russian miners haven’t performed, and trusts like JPM Emerging Markets that focus on growth stocks have done better."
"Just because their style has been against them, doesn’t mean it won’t come back into fashion again, and certainly doesn’t mean the management team isn’t any good. Neil Woodford didn’t suddenly become a bad manager in 1999 when his style was out of favour."
"Things come in and out of fashion all the time and investors tend to be too short-term, whether it’s about this particular trust or emerging markets in general."
Peters points out that the trust has only marginally underperformed over the last three years anyway, which is impressive given that large cap value has been out of favour. Templeton Emerging Markets IT has ongoing charges of 1.31 per cent and is on a discount of 8.9 per cent.
Personal Assets Trust
Both Sebastian Lyon’s Personal Assets Trust and Trojan fund have had a tough time of late, significantly underperforming their FTSE All Share benchmark over one and three years.
Lyon is risk-averse at present, as he outlined in a recent interview with FE Trustnet, and major positions in gold, inflation-linked bonds and cash have been particularly damaging.
The manager believes inflation will be a natural result of QE in the long-term, but is also protecting his portfolio from the near-term threat of deflation.
Performance of trust vs benchmark over 3yrs
Source: FE Analytics
However Charles Cade, analyst at Numis, questions why any investor who backed Lyon in the first place would consider pulling out their money now.
"I think he’s doing what he said he would do from the start – protect investors’ money," he said.
"Returns have been disappointing, but I don’t think it should be compared to an equity benchmark or its equity peers [in the IT Global Growth sector], given that its priority is to protect capital and the fact it invests in numerous asset classes."
"Lyon’s long-term record is exceptional and I wouldn’t be selling out of this trust based on the last year or so of performance. If you sell out of this trust now, I’d question why you bought it in the first place, to be honest," he added.
Cade points out that Personal Assets has a discount control mechanism, which means it should not suffer if demand wanes.
Personal Assets Trust has ongoing charges of 1.01 per cent and is on a slight premium.
Log-in to FE Trustnet next week to see your fund- and trust-picks get analysed by an industry professional.
