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What should you do if there is a major change to your fund?

In an ideal world a fund would provide investors with a long-term exposure to the markets where the manager is able to consistently add value through a clear and transparent strategy. Unfortunately, things don’t always go according to plan.

It’s possible that a fund could suffer a prolonged period of poor performance. If things get bad enough this could result in a change of manager and potentially a new strategy or mandate.

Where an overhaul is necessary it should follow a well-documented procedure, as was the case with Alliance Trust (ATST). The investment trust announced in May 2016 that it was going to undertake a strategic review. This process resulted in the board recommending a new multi-manager strategy that was recently ratified by shareholders and that has been welcomed by analysts such as Canaccord Genuity who have issued a ‘buy’ recommendation.

The problem is that some funds change things around then run into problems and have to go through it all again. A prime example is the former British Assets Trust that changed its mandate and manager to become BlackRock Income Strategies in February 2015. Unfortunately for investors its new managers failed to deliver and were sacked after less than two years with the responsibility passing to Aberdeen Asset Management.

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Reversal of fortune

Patrick Connolly, a certified financial planner at Chase de Vere Independent Financial Advisers, says that virtually every investment fund and manager will have periods of underperformance.

‘We’ve seen this recently with renowned manager Neil Woodford, who set up his own investment company and launched his first fund, Woodford Equity Income (GB00BLRZQ737), in June 2014. It has performed well since launch, although over the past year it is ranked only 73rd of 79 funds in its sector.’

It can be difficult for investors to understand why their funds are underperforming, which is why some people exit at the wrong time, often as performance is about to improve, and switch into top performing funds that could be on the verge of going into decline.

One fund that is heading in the other direction is M&G Recovery (GB0031289217). It has been managed by Tom Dobell since 2000 and invests in beaten-up stocks that look as if they are ready to recover.


‘For a number of years the fund performed well and Dobell was considered one of the top UK managers, but his style went out of fashion following the financial crisis as investors sought solid earnings and dividends in better quality stocks and the fund suffered as a result,’ explains Connolly.

M&G Recovery under-performed the FTSE All-Share Index in every year from 2011 to 2015, but anyone who had jumped ship would have missed out on the turnaround with the fund returning 37% over the last year as the manager’s style came back into favour.

New manager

A sustained period of poor performance will often result
in the replacement of the manager. This sort of drastic intervention could open up the potential for some significant changes to the fund.

Ryan Hughes, head of fund selection at AJ Bell Investments, says that investors need to be careful when looking at these sorts of turnaround opportunities as they need to be fairly certain that the worst is over.

‘When a new manager is appointed, it is often the case that there is a lot of portfolio turnover where they sell the stocks in the portfolio they don’t like and replace them with the ones they do. This generates transaction costs that can hamper returns in the short-term.’

If you own a fund that goes into a turnaround situation, it is often best to remain patient as otherwise you could end up crystallising your losses at the bottom of the cycle just before a recovery kicks in.

A recent example is the Miton UK Value Opportunities (GB00B8QW1M42) fund, where the managers George Godbar and Georgina Hamilton resigned in April 2015 to join Polar Capital. Their departure came straight after the EU referendum, which had a disastrous effect on their mid-cap orientated fund.

‘This was a highly popular fund with over £800m in assets, but their departure sparked a mass exodus with circa £600m leaving the fund. The new manager Andrew Jackson took the helm in June and has now repositioned the portfolio,’ explains Hughes.

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Change happens

Darius McDermott, MD of Chelsea Financial Services, says that sometimes a major macro event can impact a strategy, or a
fund can get too large for its mandate, such as with a smaller companies fund.

‘If you like the new manager or the new strategy suits your investment goals you may consider investing. When it comes to divesting, a red flag would be underperformance of three years or more, or underperformance that the manager can’t explain or that you wouldn’t expect given the prevailing market conditions.’

Stewart Investors Asia Pacific Leaders (GB0033874214) had a manager change about 18 months ago. The new manager has put their mark on the fund by having more sustainable investments in the remit, which is a relatively small change but one that Chelsea thought was worth sticking with.

‘Another example is Jupiter Absolute Return (GB00B5129B32). This fund was very good for a while but then had a long period of underperformance and eventually the manager retired. The new manager changed it a lot, making the investment strategy their own and it is now doing very well and we like it a lot,’ notes McDermott. (NS)

‘When a new manager is appointed, it is often the case that there is a lot of portfolio turnover where they sell the stocks in the portfolio they don’t like and replace them
with the ones they do. ’

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