If the manager offers no explanation for their underperformance and shows no signs of turning things around, selling out of their fund is very reasonable. If the manager is aiming to turn around performance by overhauling the style or focus of the fund, this could be an even bigger indication that the time to sell has come.
However, growing frustrated and selling out of a quality manager with a long-term, thought-out strategy can be very damaging, as was arguably the case when many investors gave up on Neil Woodford’s Invesco Perpetual High Income fund at the height of the dotcom bubble.
Many investors grew tired of Woodford’s refusal to jump on the tech-boom bandwagon – a high-conviction move that eventually proved to be the correct one.
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 highlight three high-profile open-ended funds that are proving problematic with our readers.
M&G Recovery
Tom Dobell’s £7.4bn portfolio is one of the oldest and largest funds in the UK market, so it is hardly surprising that many investors have grown frustrated by its underperformance in recent years.
Our data shows that the fund has fallen short of its IMA UK All Companies sector and FTSE All Share index benchmark over one, three and five years, thanks largely to a poor run since the beginning of 2012.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
However Tim Cockerill, head of research at Rowan Dartington, believes those already invested in the fund should stay put, and even sees it as a "buy" for those who do not currently hold it.
"The fund has gone through quite a few changes in the last year to 18 months, with major positions in the likes of African Minerals," Cockerill explained.
"It has been re-shaped, and it is almost now in a waiting phase. It is important to remember that recovery funds look to get into recovery stories early on, which means investors have to be patient.""In my view, I suspect that in 'I don’t know how many' years, these recovery stocks will work out and you’ll see performance pick up."
"I wouldn’t sell out of it, and would consider it a possible buy. Tom Dobell (pictured) has an excellent record and has a great team over there at M&G. He’s not doing much different – he’s just gone a little more left-field."
Performance of fund vs sector over 10yrs
Source: FE Analytics
Some commentators have pointed to the fund’s large size as a potential weakness, as it limits the degree of flexibility Dobell has to invest across the market cap spectrum.
Cockerill acknowledges that Dobell has his hands tied to some extent, but doesn’t buy into the argument that M&G Recovery is no longer a recovery fund.
"Size is always something that comes up, especially with a fund such as this," he explained.
"I think it all comes down to what your definition of a recovery fund is. In some people’s minds, a recovery fund shouldn’t typically invest in FTSE 100 stocks, and when it does it should be in ones that are bombed out."
"Dobell has a different definition. He has some speculative positions in companies like African Minerals, which hasn’t sat well with a lot of people. However, he’s got a lot of conviction in this, along with others. After all, the course of recovery funds isn’t as smooth as others," he added.
In a recent interview with FE Trustnet, Dobell brushed off concerns over fund size and fully explained what he defines as a recovery stock.
M&G Recovery requires a minimum investment of £500 and has an ongoing charges figure (OCF) of 1.65 per cent.
JPM Natural Resources
For many years, this £970m fund has been the go-to product for investors looking for exposure to natural resources.
However, the recent dire run for the sector and relative underperformance since Neil Gregson took over as lead manager from Ian Henderson last year has left many investors to question its place in their portfolio.
Performance of fund and index since Jan 2012
Source: FE Analytics
One of our readers says he is considering "cutting his losses" and transferring the remaining assets into an equity income or smaller companies fund.
Cockerill says the decision depends on the investor’s risk profile and his reasons for buying the fund in the first place.
"The fund has disappointed because the natural resources sector has done so badly recently," he explained.
"At the end of the day, a large portion of performance comes down to the performance of the asset class."
"The fund has underperformed as well, but when momentum is so firmly against an asset class, it’s difficult to see what the manager is doing wrong and doing well. It’s hard to see what’s going on at the margins, so I wouldn’t hold that too much against the fund."
"I’ve seen the fund as an asset-allocation play for many years, and to my knowledge, it continues to fulfil it."
"When it comes to whether an investor should sell it or not, I think for high-risk investors it still has a place. For those who have a low or medium risk profile, I’d have to question why it’s in there in the first place."
He points out that a lot of investors may have snapped up units in the fund in the aftermath of its stellar run in the early- to mid-2000s, regardless of their risk-appetite.
Cockerill continued: "From a portfolio-construction point of view, this is a fund that’s full of stocks that have gotten cheaper and cheaper. If you’ve got 4, 5, 6 per cent of your portfolio in this fund, then you’re going to see a big return when a bounce-back occurs, which is quite reasonable and even likely."
Cockerill again thinks the fund suits a monthly savings plan, because if natural resources continue to fall, it will allow investors to snap up units at cheaper prices.
JPM Natural Resources requires a minimum investment of £1,000 and has an OCF of 1.68 per cent.
Marlborough Special Sits
Giles Hargreave’s Marlborough Special Situaitons fund is the surprise package on here, given that it is ahead of its IMA UK Smaller Companies sector average – which is also its benchmark – over three, five and 10 years.
However, relatively mediocre performance in 2012 and 2013 has seen it fall behind its sector average over a one-year period, and into the second quartile over three years.
This has prompted some investors to ask whether Hargreave is losing his touch.
Performance of fund vs sector over 10yrs
| Name | 1yr returns (%) |
3yr returns (%) | 5yr returns (%) | 10yr returns (%) |
|---|---|---|---|---|
| IMA UK Smaller Companies | 32.24 | 62.9 | 79.85 | 202.36 |
| Marlborough - Special Situations | 29.1 | 79.38 | 108.61 | 404.14 |
Source: FE Analytics
The manager recently said he was upping his exposure to mid caps to ease concerns over liquidity, which has added to some investors’ concerns.
Cockerill acknowledges the worries concerning mid cap exposure, but assures investors that Hargreave is acting in their best interests.
"A lot of small cap managers have a lot in mid caps, in order to take advantage of opportunities and to combat issues over liquidity," he explained.
"The issue here is whether investors are happy to have exposure to mid caps in this fund, or whether they want a pure small cap fund. If you want the latter, then a manager who’s moving into mid caps probably isn’t for you."
"To be honest, I think it’s very useful that the manager alerted investors to these changes as it gives them the opportunity to move. I personally don’t have a problem with the fund as Hargreave is a proven stockpicker and has a very good record."
"However, if you’re uncomfortable with having more mid cap exposure, you probably need to look elsewhere."
Cockerill points out that there are very few pure small cap funds available to UK investors, because so many managers have a hefty portion of their assets in the FTSE 250 index.
He points to FE Alpha Manager John McClure’s Unicorn UK Smaller Companies fund as one of the few options available. Marlborough Special Sits requires a minimum investment of £1,000 and has an OCF of 1.53 per cent.
In the first article in the series, we looked at the underperforming investment trusts that readers are currently worried about.
