You have a money-losing mutual fund on your hands, but you're sticking with it. Are you a sensibly patient investor or a patsy?
Learn to know the difference and you can save yourself from losses in your portfolio that may take years to heal. Here's an idea of the mathematical logic in play here: If you invest $1,000 and lose 25 per cent, it takes a 33-per-cent gain just to break even.
Dealing with underperforming mutual funds is a matter that rarely comes up in the world of mutual fund companies, the advisers who sell funds and the analysts who rate them. You can fill a room with reports recommending various funds, but clear sell recommendations are virtually unheard of.
This disparity is partly a reflection of the fact that there's nothing more lucrative to fund companies and advisers than clients who buy and hold forever, thereby creating a continuing stream of fee revenue. But it also highlights how much harder it is to make a case to sell a fund as opposed to buying it.
As a mutual fund investor, you have to get a feel for assessing underperforming funds using mostly facts, but also a little of what your gut tells you. To show the way, let's look at some mutual funds that have done something you'd think would make them an obvious sell, which is losing money on average in each of the past five years.
Globefund.com analyst Tilly Cheung screened the universe of funds and came up about 400 or so that were under water for the five years to Oct. 31. Most are in the global, international and U.S. equity categories, decimated since the stock markets turned sour in early 2000, but several are in sectors like technology and the Far East and a few others are Canadian equity funds.
Is a fund an automatic sell if it's under water for several years in a row? Asked this question five years ago, most investors would have shouted "Yes" and pounded their fist on the table for emphasis. Today, the answer is not so clear.
One of the biggest funds on the list of five-year losers is the $3.1-billion Fidelity International Portfolio. Let's dissect it to see if holding it shows patience or passivity.
First off, you need to put it into context by looking at how other global equity funds have performed in the past five years. The answer, in a word, is rotten. The average loss over this period is a compound average annual 2.8 per cent, which compares with an average loss of 4.8 per cent for Fidelity International Portfolio. This fund is also worse than average in the past one- and three-year periods, but it beats the average in the past 10 and 15 years.
Now for year-by-year consistency. Here, the fund doesn't look too bad. It ranked among the top 25 per cent of funds, or in the top quartile, in two of the past eight years and in the second quartile in three of the past eight years. The remaining years were spent in the third quartile, meaning below average but not among the worst 25 per cent.
One reason you might want to hold on to a disappointing fund like Fidelity International Portfolio would be short-term momentum that suggests a rebound. Unfortunately, this fund's been a fair bit worse than average over the past one-, three- and six-month periods.
The way I read the data, Fidelity International Portfolio is a sell. But wait -- here's where gut feeling comes in.
As the largest mutual fund company in the world, Fidelity has a lot of corporate pride bound up in its marquee global equity fund for Canadians. If that's not a motivation to fix this fund, then there are all the annoyed financial advisers who collectively put billions in client money into this fund. The pressure is on Fidelity to get this fund moving -- for me, this is reason to stay put for an extra six to 12 months to see if a turnaround develops.
Mackenzie Financial has to be feeling the same pressure with respect to Mackenzie Select Managers, which also came up on our screen of five-year losers. This is a $1.4-billion global equity fund with an $841-million spinoff fund that is set up to be domestic content for registered plans.
With Mackenzie Select Managers, the data and my gut feeling come together to deliver a sell message. This fund has a pattern of up-and-down years that coalesce into worse-than-average numbers over almost every time frame. Over the five years to Oct. 31, the 7.5-per-cent loss is much worse than the global equity category average. Mackenzie has tried something interesting with this fund -- six management teams each contributing their own favourite stocks. But it just doesn't seem to be working.
Holding onto the $511-million Clarica Canadian Blue Chip Fund is like a case of passivity bordering on paralysis. While the average Canadian equity fund made 6.3 per cent in the five years to Oct. 31, this fund somehow blundered its way to an average loss of 1.23 per cent.
Dig a bit, though, and you'll see there's reason to regard this fund as a keeper. In February, 2003, a manager named Eric Bushell took over and has produced much better than average results. Mr. Bushell's credentials are good in that his CI Signature Select Canadian Fund has been a very strong performer over the past five years.
Ideally, you should address a slumping fund before you run into a five-year stretch of losses. Whether you work with a financial adviser or invest on your own, annual portfolio reviews are a must. Do not sell a fund because of a bad year, but make a note to keep an eye on it.
After two years of significantly below-average returns, your scrutiny is no longer casual. After three years, you have a choice to make.
If your fund doesn't have a solid record, make a commitment to buy better funds. If a fund has good returns and the manager is still in place, you may want to hang on.
Just as important as the decision to jump a sinking fund is the matter of where you're going to land. Never discard a low-down fund for one you've chosen because it's among the performance leaders for the past year. Selling low and buying high can lock you into a repetitive cycle of disappointing investments.
One consideration in dealing with a disappointing fund is whether you'll face a redemption fee if you sell. A way around this may be to switch to another fund at the same company. For instance, unhappy unitholders of Mackenzie Select Managers have two good alternatives, Mackenzie Ivy Foreign Equity and Mackenzie Cundill Value.
Another option is to beat a strategic retreat from a disappointing fund by selling up to 10 per cent of your holdings a year. Many companies permit unitholders to sell this much without redemption fees.
Now it's time to get out your latest investment or registered retirement account statement to check how your funds are doing. Are any of them on the list of five-year losers, or have they been below average for a couple of years in a row? If so, then you have a question to answer: Are you being sensibly patient in owning these funds, or are you a patsy?
Know when to fold
Here are some steps you can take to assess whether you should sell an underperforming mutual fund.
Get the big picture.
Compare your fund to others in the same category in terms of long- medium- and short-term performance and on year-by-year consistency. The Globefund.com website has all the information you need.
Consider whom you're dealing with.
Top fund companies have the resources to fix funds gone sour, and they have plenty of motivation in the form of dissatisfied clients and advisers.
Don't chase performance.
It's often a big mistake to replace a slumping fund with one that's riding high on the performance charts. You're essentially buying high and selling low in doing this.
Consider the alternatives.
There's no point moving to another fund unless you can find something demonstrably better.
Get a second opinion.
The Morningstar.ca website offers free analyst reports on many funds.
Rankings funds with negative 5-year returns as of October 31, 2004:
LOSING BIG Ranked by returns
|Fund name||Asset class||5 yr. Rtrn|
|1||@rgentum U.S. Master Portfolio||U.S. Equity||-56.85%|
|2||Mavrix Growth||Canadian Equity||-27.03%|
|3||Altamira e-business||Science and Tech.||-22.15%|
|4||AIM Global Technology||Science and Tech.||-20.85%|
|5||AIM RSP American Growth||U.S. Equity||-20.00%|
|6||AIM American Growth||U.S. Equity||-19.76%|
|7||TD Science & Technology||Science and Tech.||-19.73%|
|8||CIBC Global Technology||Science and Tech.||-19.42%|
|9||National Bank Global Tech.||Science and Tech.||-19.17%|
|10||Talvest Global Sci. & Tech.||Science and Tech.||-18.79%|
|11||CI Global Sci. & Tech. RSP||Science and Tech.||-18.26%|
|12||CI Global Sci. & Tech. Sec.||Science and Tech.||-18.10%|
|14||Altamira Sci. & Tech.||Science and Tech.||-17.54%|
|15||Clarington Global Comm.||Science and Tech.||-17.33%|
BIG LOSERS Ranked by assets
.........Fund Name....................................Asset Class.............Net Assets............5-yr. Rtrn
|1||Templeton Growth Fund Ltd.||Global Equity||$5.9-billion||-0.25%|
|2||Fidelity Int'l Portfolio-A||Global Equity||$3.1-billion||-4.77%|
|3||Templeton Int'l Stock||Int'l Equity||$2.6-billion||-3.74%|
|4||CI Global||Global Equity||$1.6-billion||-3.49%|
|5||Mackenzie Select Managers||Global Equity||$1.4-billion||-7.51%|
|6||RBC U.S. Equity||U.S. Equity||$1.2-billion||-5.41%|
|7||CI Global Boomernomics Sec.||Global Bal. & Asset Alloc.||$896.1-million||-3.57%|
|8||AGF American Growth Class||U.S. Equity||$886.3-million||-12.99%|
|9||PH&N U.S. Equity-A||U.S. Equity||$874.2-million||-7.96%|
|10||Mackenzie Sel. Mngrs. RSP||$841.7-million||-7.86%|
|11||TD U.S. RSP Index||U.S. Equity||$820.5-million||-3.44%|
|12||RBC European Equity||European Eq.||$819.0-million||-5.22%|
|13||CI International Balanced||Global Bal. & Asset Alloc.||$783.7-million||-1.99%|
|14||CIBC U.S. Index RRSP||U.S. Equity||$755.1-million||-6.99%|
|15||RBC U.S. RSP Index||U.S. Equity||$673.5-million||-3.41%|
© 2007 The Globe and Mail. All rights reserved.
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