Five questions to consider before selling a fund

Kyle Caldwell
6 November 2017

Many funds have been underperforming lately. The most recent research shows that more than 90% of funds fall short of delivering above-average returns over a three-year period. If you're planning on selling, here's what to consider.

First, ask yourself: has the fund’s strategy changed? A change in investment strategy is often viewed as the number one red flag that should give investors cause for concern. Altering an approach may not necessarily be a bad move, but if a fund is no longer doing what you bought it to do, it is probably time to hit the sell button. 

Second, ask if the fund manager willing to accept that they are wrong. Some fund managers find it difficult to accept that they have got things wrong and will therefore be unwilling to adapt.

"This is why I prefer stock pickers over those who try to make big macro calls," says Rob Morgan, a pension and investment analyst at Charles Stanley Direct. "Some fund managers will never change their tune and insist the market is incorrect rather than their own position."

Third: has the fund become too big? Consider the size of the fund. Put simply, the bigger an active fund becomes, the tougher it is for a fund manager to "move the dial", as the pool of stocks in which they can build meaningful positions shrinks.

Fourth: has your risk profile changed? Depending on their goals and investment horizons, the amount of risk investors are prepared to stomach tends to change markedly over time.  For example, those entering retirement and drawing income may want to focus strongly on income-producing assets, as opposed to growth producers. Make sure your portfolio reflects your needs.

Finally, ask you if there are there better alternatives out there. There’s no harm in checking the competition and considering an alternative fund. A good place to start is Moneywise's First 50 Funds for beginners.

This article was originally published on our sister website Money Observer.

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