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When to sell

Nov 29 2019 12:34
Paul Hutchinson

Generally, you should not alter your investment strategy or its execution – unless it was incorrect at the outset, or your personal or financial circumstances change. 

Absent these changes, the basic rule is: “Do not let shorter-term market fluctuations and negative market commentary sway your commitment to your long-term investment goals.” 

Research supports the view that investor behaviour is a destroyer of investor returns, and that investors should “stay the course”.

Having said that, we believe you should re-evaluate a fund in which you are invested if one of the following warning signals is triggered: 

Change in the portfolio manager or team of supporting analysts

The portfolio manager is the key individual responsible for delivering on a fund’s investment objective. 

Prior to making your investment, you and your financial adviser should have evaluated the portfolio manager’s ability to deliver on the fund’s mandate. 

A change in the portfolio manager requires an evaluation of the new portfolio manager’s ability to continue to deliver the fund’s mandate.

In most instances, a portfolio manager is supported by a team of investment analysts. 

It is likely that these analysts play a significant role in the fund meeting its investment objective over time. 

Therefore, changes to the analyst team also necessitate a re-evaluation of the fund. 

Evidence of investment philosophy drift

When selecting a fund to assist you in meeting your long-term investment objectives, you may have done so based on the portfolio manager’s investment philosophy. 

This may, for example, include a focus on value, growth or momentum investing. 

It may be that after a period of underperformance, due to the investment style being out of favour, the portfolio manager starts to drift away from the fund’s investment philosophy. 

This style drift will likely result in the fund neither meeting its investment objective over time, nor fulfilling the role for which you selected it. 

Asset manager corporate action

Change in the ownership structure, particularly where the asset manager has been acquired by a third party, can be very distracting to all staff, including investment professionals, if it is not managed properly. 

Portfolio managers and investment analysts are human, and a change in ownership could result in an inward focus. 

Independent and focused asset managers with significant staff ownership are well-aligned to deliver on client expectations over time. 

A better alternative emerges

While the fund which was selected may continue to meet its investment objective over time, it may be that a better alternative emerged. 

It is important that financial advisers, and their support team or fund selection partners, continue to research the fund peer group. 

If an alternative fund consistently delivers better risk-adjusted returns, it may make sense to introduce this fund into your portfolio. 

Graph

Value for money

You need to ensure that you are sufficiently rewarded over the long term for the investment management fee you’re paying. 

A lower fee may not necessarily indicate a better fund performance. 

Similarly, a higher fee needs to be scrutinised to ensure that you get value for money. 

Luck rather than skill

When making the initial investment, your analysis suggested the portfolio manager had a demonstrable skill. 

But over time it now appears that, for whatever reason, this outperformance proved to be based on luck rather than skill. 

A re-evaluation is warranted – luck isn’t enduring over time. 

Material changes to the economic and investment environment

Over time, economies are expansionary and investment markets deliver positive returns. 

However, at times both become over-heated. 

At this point it may make sense to de-risk your portfolio by reducing exposure to high beta funds, or those funds that follow a momentum investment philosophy, for example, and introducing more defensively-positioned funds to your portfolio – for example funds that follow a quality investment philosophy. 

Unfortunately, timing such a move is difficult and therefore it makes sense to include a defensively-managed fund to which you maintain exposure throughout the cycle. 

While funds such as the Investec Cautious Managed, Opportunity or Global Franchise Funds meaningfully participate in strongly positive markets, they demonstrate the true strength and quality of the team’s approach when markets decline or move sideways. 

The result is that they outperform throughout the market cycle, as illustrated in the above graph of the Investec Opportunity Fund. 

This enduring performance has proven beneficial to long-term investors.

While this list is not exhaustive, it provides some warning signals that should trigger the re-evaluation of your current fund holdings. 

Importantly, any change should be carefully considered in the context of your overall investment objectives and any potential capital gains tax consequences. Again, we would recommend that this be done in consultation with a qualified financial adviser. 

Paul Hutchinson is sales manager at Investec Asset Management.

This article originally appeared in the Fund Focus supplement in the 21 November edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

investment  |  strategy  |  markets
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