New Model Adviser has an interesting article today with sound comments from a number of advisers. In short there are many views about when and how to drop a fund from your investment universe? (here).

Clearly a fund manager will have a view as to why their fund has failed to perform in the past and why it will perform more effectively in the future. This is after all their job and their opinion is likely to be as valuable as that of anybody else on the situation.

However, while they may be trapped in a falling market or sector that makes their job similar to catching a piano as it falls from the fourth floor, you do not need to be standing next to them as they do this.

A key factor of our approach is that we like to look at the evidence as well as the opinions.

  •  What markets and industry sectors is the fund exposed to?
  • Are we likely to see further deterioration based on the evidence available?
  • Importantly, do we have a better alternative opportunity?

At this point it is worth considering what is meant by “underperforming”. Is it “going up more slowly”, is it “falling more quickly” than “the market” or “we hoped”.

Rising more slowly may be a sign of a safe and steady investment strategy, which simply avoids volatile or more risky securities. This is no bad thing at all. As such, we may not want to incur the costs associated with switching funds, particularly if our alternative is more volatile.

Where we would be concerned is when we experience a negative price trend because we can always “go to cash” with at least a part of the investment until the strength of this negative trend diminishes. Using cash as a store for value and returning to the same investment at a later stage at least stays true to the original purpose of the portfolio in the short term.

Our approach is built on the simple ideas of:

  • Having evidence at the earliest stage that you have a “problem” in the first place;
  • Taking decisive action (or not) in terms of transactions to address the problem; and
  • Finding an alternative opportunity that justifies your actions.

It is worth remembering that you established the client portfolio with sound long term purposes and you should not be distracted in the short term by the “noise” of the market. However, by tactically re-allocating part of each investment in the short term you can seek to retain value in the portfolio over time.

Our weekly reports are designed to provide a lead on the trends in markets and sectors as they develop. Putting this type of performance on the radar gives you time to consider why the fund is in your portfolio, but more importantly if you should reduce your client’s exposure or at least avoid increasing their exposure for the time being.

For further information on Sinergi products (Click here).

Keith Reid
Keith Reid
Keith’s training as an accountant and auditor has emphasized the importance of evidence in all good decision making process. The ability to monitor management processes effectively is a key to making the most of business opportunities. Both Keith and Gerry believe that this priority for capital preservation is the common principle that sets the framework for any sound investment strategy or business model.