Excessive trading due to easier-to-use platforms, a surplus of funds and an increasingly impatient investor is a growing problem for the funds industry, according to Hargreaves Lansdown’s Mark Dampier. 
The head of research (pictured) said taking money out of the funds that underperform is becoming a more common habit among investors.
He explained: “People look at their portfolios now, and, let’s say they have ten funds, and after a year review, they see two which are rubbish. They’ll say ‘let’s change these two and put the ones that do well’.
“Then the whole structure of the portfolio, as they’re doing it themselves, just goes completely out of sync.”
Dampier added: “But the last thing open-ended investments want is cash in and out all the time every three or four months, as you kill the form of the fund.”
One of the main reasons behind this behaviour, he said, is a general lack of patience by those who hold funds for not long enough.
Average holding periods of retail investors
Source: The Investment Association
“The average holding time per fund, which is three years now, is down 20 per cent over the last ten years, which points at that easy-trade trend,” Dampier noted.
“People often get really impatient really quickly. It’s your emotion, I’ve also done bad personally and I look back and say ‘what a stupid idiot’.
“In my portfolio I have some funds that are not such good performers and I don’t know when they will go up but I am happy to have a little bit of poor performance because I’ve got other funds that do [different] things.”
He explained: “That’s how it works. If every fund in your portfolio is doing well, you are doing something wrong.”
The media are also to blame, according to Dampier, who said the best thing that investors can do when there is a crisis in markets is avoid “reading too much”.
“People are too impatient and people read, which may not sound very well to journalists, but people read too much,” he said.
“The best thing they can do when there is a crisis is go out and play golf, read, fish. But don’t look at the screen and stop reading the newspapers for a while.”
An example of such behaviour, he said, was highlighted during the global financial crisis, when investors panicked and sold out of their funds.
The best thing investors that could have done in 2008, Dampier said, was to have gone away for a year and come back in 2009.
“Lots of people sold, it was a really interesting period. Investment funds fell 15 per cent,” the Hargreaves Lansdown head of research said.
“Four or five years down the line the same funds were up 250 or 300 per cent but people would never have bought them back again. Never,” he pointed out.
Performance of indices since 2009
Source: FE Analytics
Technology, and the greater ease of access investors have to their portfolios via mobile apps is another explanation for that increase in buying and selling of funds in the recent years. A fact that, combined with a surplus in the funds available, makes it harder for people to keep calm and stay invested.
“We are also to blame because we make it really easy. You can look at your portfolio anywhere in the world and you can change it anytime virtually as well,” he said.
“The industry also makes it harder and harder for clients, because the more choice we give to people the worse [it is].”
People buying active funds when they lack interest or knowledge in investing is also adding to the problem, as people buy funds but often don’t have the time to look at its performance and the manager who oversees the strategy. In such cases, Dampier said, a passive vehicle is the place to be.
“Picking active funds is actually quite difficult so if you are not prepared to spend the time to look at it, then you are better in passive” he explained.
“Taking this year as an example, passive has some really good uses. I am really happy to get people into investment and if that means they buy a passive that’s great.”
Dampier said if investors choose an active strategy the best thing to do is find a good manager and stick by them, adding that they should have a minimum track record of three years.
The head of research said that even with managers such as Neil Woodford that have experienced challenges to the strategy more recently, investors should be prepared to wait.
“It could be that he’s lost the plot completely, it does happen,” he added. “I’m not so silly that I don’t realise that, but on the balance of probabilities over the years things change.”
Dampier said he admired managers such as Terry Smith and Nick Train that have a ‘fantastic tailwind’ behind them.
“But [then] you get people like for example Tom Dobell. The market is not interested in those [special situations] stocks and it’s been like that for a number of years because of the financial crisis or so,” he said.
“But Tom is not going to change what he does because that could be a bit weird and you can either be patient with it and say ‘we’ll have that Recovery fund in there because when the market does [go up] it will really change’.”
Dobell has managed M&G Recovery fund since 2000, however, it fund was one of the funds shedding the most assets during 2017 as investors eschewed the style.
Over the time Dobell has overseen the strategy, M&G Recovery has delivered a 201.67 per cent total return compared with a 132.23 per cent gain for the average fund in the IA UK All Companies sector and a 138.22 per cent return for the FTSE All Share benchmark
Performance of fund under Dobell
Source: FE Analytics
Indeed, the basis for a proper portfolio, said Dampier, lies in choosing fund managers that do different things at different points in time.
“Find a happy medium. You want a high level of engagement without making hasty decisions. And find a good manager and stick with him,” he added.