“You’ve dropped my fund from the first 50 funds list. What should I do?”

10 July 2019

When a fund you’ve invested in leaves our First 50 Funds, should it be a cause for concern?

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I started investing this year, using the Moneywise First 50 Funds for investment ideas, and I invested in the Fidelity Moneybuilder Income fund. However you’ve dropped it from your list in favour of the BlackRock Corporate Bond fund. What should I do?

Initial diagnosis

Using Moneywise’s First 50 Funds is a great way to choose your investments, especially if you’re starting out and the prospect of picking from thousands of funds can seem daunting.

All of the funds that make the list have been selected for their performance, charges and suitability for a novice investor.

Keeping an eye on the list is sensible but Danny Cox, chartered financial planner at Hargreaves Lansdown, says it’s not necessary to be a slave to what makes the top 50. “When a fund moves off an investment service’s preferred list, it does not necessarily mean it’s a sell,” he explains. “It’s unusual for any investment to turn from a ‘buy’ to a ‘sell’ quickly and usually, moving off a list means it becomes a ‘hold’. It’s usually because there is an alternative fund the service favours more.”

Diagnostic tests

It’s important to understand why the fund has fallen off the list. In the case of the Fidelity Moneybuilder Income fund, it’s because the manager, Ian Spreadbury, retired at the end of 2018 after managing the fund for 25 years.

As fund performance can be affected when a manager leaves, his departure warranted closer inspection. This found that it wasn’t performing as well as a similar fund, BlackRock Corporate Bond.

While the prospect of higher returns makes the BlackRock fund a good choice for anyone starting out, Patrick Connolly, chartered financial planner at Chase de Vere, says this is only part of the story. “The Fidelity fund takes a defensive approach, with a focus on downside protection. This means it tends to underperform in a stronger market, such as we’ve seen in the past three to five years. In more difficult times, it is likely to outperform.”

He adds that as both funds have very similar yields and charges, the decision to stay with the Fidelity fund or switch to BlackRock should come down to how you feel the market will perform in the next few years.

Treatment costs

As well as carefully weighing up the investment potential of the two funds, it’s also important to consider the cost of switching.

Where the difference in performance is likely to be marginal, any uplift could be lost as a result of the charges you will incur.

Hannah Owen, financial planner at Quilter Private Client Advisers, says that platform charges should always be carefully considered to ensure they suit your style of investing. She explains: “If you’re on a platform that charges for fund switches, you should choose funds and stick with them unless there is a really good reason to move, such as extremely poor performance or any concerns about the future of the fund.”

Treatment plan

If you do decide that the costs and the performance prospects mean a switch is your best option, this is easy to do. “Transferring between funds is very simple,” says Mr Connolly. “If your investments are held on a platform you can do it all online and it should only take a few minutes.”

If you don’t already hold your investments in an Isa, and you have available allowance, transfer them into this tax-efficient wrapper. Mr Cox explains: “The benefit of an Isa is you can switch investments without any tax consequences. Outside of an Isa wrapper, a switch could trigger a capital gains tax charge if you made a significant profit.”

Alternative therapy

Rather than switching out of the Fidelity fund, you might decide to leave your money where it is.

“Both of these are good funds – you don’t need to switch because it’s no longer on the list,” says Mr Connolly. “But remember that the funds you hold should be based on your circumstances, what you’re trying to achieve and how much risk you’re willing and able to accept.”

If you do stick, you could simply redirect future payments that were intended for the Fidelity fund to the BlackRock fund. By doing this, you spread your portfolio across funds with different investment styles, and with this diversification helping to reduce risk.

Do you have a question for the Investment Doctor? Email editor@moneywise.co.uk

SAM BARRETT writes for Money Observer, FTAdviser.com and Insurance Post

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