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They may be top-performing funds, but how much money have they actually made you?

08 October 2014

FE Trustnet looks at some of the most notorious examples when investors have either bought or sold funds at completely the wrong time.

By Alex Paget,

Senior Reporter, FE Trustnet

In a recent FE Trustnet article, Sanford Deland’s Keith Ashworth-Lord said the major reason why investors miss out on returns is because they tend to be overly active in their portfolios; either switching out of the funds that are going through a period of underperformance or jumping into ones that have already done well.

He used the example of Peter Lynch’s Fidelity Magellan fund, which had phenomenal track record in the 1980s.

While the fund beat the S&P 500 in 11 of the years between 1977 and 1990 and delivered an annualised return of 29 per cent, Lynch believed most of his unit holders actually lost money because of their poor timing.

This got us thinking.

While it is always interesting to look back at a fund’s past performance – particularly if it has done well – the majority of investors in that portfolio could have had very different outcomes depending when they bought and sold.

ALT_TAG Simon Evan-Cook, a multi-asset manager at Premier, says this is a subject that isn’t talked about enough by the industry.

“It’s an issue that is worth tackling because I do believe the biggest destroyer of wealth for an investor is chasing trends and basically buying, or selling, at the wrong time,” Evan-Cook (pictured) said.

“If you just buy a fund that has already performed well, not only is there the risk that it becomes too big but you are also probably backing a style that is working at the moment but may well fall out of favour soon.”

“It’s probably not as simple as saying buying high and selling low, but it isn’t far off.”

Therefore, using fund flow data from FE Analytics and anecdotal evidence of when certain areas of the market have been in vogue, we look at some – albeit cherry-picked – examples where investors may have got their timing particularly wrong.


Rushing to a hot trend

One of the most recent examples was the almost frenzied desire to own multi-cap income funds at the start of this year.

Due to their focus on smaller companies, which performed well as investors felt more comfortable taking extra risk in a recovering UK economy, the likes of Unicorn UK Income, PFS Chelverton UK Equity Income and Marlborough Multi Cap Income have topped the IMA UK Equity Income sector over the last three years or so.

According to FE Analytics, all three portfolios returned around 30 per cent in 2012 and a further 40 per cent in 2013.

However, fund flow data from FE Analytics shows that a large proportion of assets came into the three portfolios towards the end of last year on the back of those previously strong returns.

While this also includes NAV gains, the Marlborough, Unicorn and Chelverton funds all at least doubled in size between June and December 2013.


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Source: FE Analytics

At the start of 2014, statistics showed they were still hot property with ISA investors and, while many people will be holding them for the longer term, all three portfolios have underperformed and lost money so far this year.

Evan-Cook says this is a good example of investors being drawn into an investment style that has already performed well.

While small and mid-caps dominated in recent years, they have sold off this year as the market has favoured larger, and perceivably safer, companies as risks have mounted.


Piling in before a soft-closure

Another example of investors being lured into an outperforming style was with the Aberdeen Global Emerging Markets Smaller Companies fund.

Due to strong inflows, the group announced in February last year that it was going to soft-close the fund in April, giving investors a few months to gain exposure to the portfolio.

On the day of the announcement, the then-$3.1bn fund had been the best performing portfolio in the IMA Global Emerging Markets sector since its launch in April 2007 with returns of 126.85 per cent, beating its MSCI Emerging Markets Small Cap benchmark by 43.41 per cent.

Performance of fund vs sector and index Apr 2007 to Feb 2013

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Source: FE Analytics

In the coming months the fund’s AUM swelled to $3.5bn until the 2 per cent charge was implemented.

However, as Aberdeen’s focus on quality companies has fallen out of favour, the fund has since lost 3 per cent since February last year, while its benchmark has returned 3 per cent.


Performance of fund vs sector and index since Feb 2013

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Source: FE Analytics


Buying into the giants

While Evan-Cook says investors can be guilty of backing yesterday’s winners, he also points out they can swamp top-performing funds in doing so.

Tom Dobell has defended the size of his £6.2bn M&G Recovery fund on a number of occasions and has attributed his fund’s underperformance in 2011, 2012, 2013 and 2014 on stock specific issues, not the portfolio’s growing AUM.

While Evan-Cook still expects the fund to outperform over a full market cycle, he says the size of the fund – which peaked at £8.2bn in February 2012 – means that investors will have to wait for those returns.

He says that is the case because Dobell has to wait for a big shift in sentiment for his strategy to work.

In the past he could implement a number of niche themes as he was running a smaller pool of money.

Now the manager is only likely to outperform when M&A activity begins to spike, according to Evan-Cook.

The size of M&G Recovery does seem to have had an impact on performance, as between March 2000 – when Dobell took over the fund – and 2010; it beat the sector and its FTSE All Share benchmark in each calendar year.

Over that time, the fund’s AUM grew from around £1bn to more than £6bn.

While the fund has significantly outperformed over the time Dobell has been at the helm, the table below shows the different outcomes investors have had, relative to the FTSE All Share, if they had bought at different times over the years as the fund’s AUM has grown.

For instance, if they had bought in March 2000, they would have since seen a return 57.7 percentage points greater than the FTSE All Share’s gains.

If they had bought in September 2009, on the other hand, they would have underperformed against the index by 26.52 percentage points.

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Source: FE Analytics


Our data for historical fund size for the portfolio only spans back to September 2005, hence the estimated £1bn size of the fund when Dobell first took charge in March 2000.


Selling at the wrong time

Data from FE Analytics also shows investors have locked in losses by selling funds that were going through periods of underperformance when they could have achieved market-beating returns if they had remained patient.

A good illustration of this was with Fidelity Special Situations under Sanjeev Shah, as the manager was lambasted for his high weighting to banks in the years immediately after the financial crisis.

Shah took over the flagship fund from Anthony Bolton in January 2008 and relinquished control to Alex Wright in December 2013.

According to FE Analytics, over Shah’s tenure as manager Fidelity Special Situations was a top quartile performer in the IMA UK All Companies sector with returns of 59.22 per cent; beating the FTSE All Share which returned 36.75 per cent.

However, money began to come out of the fund in 2012 after a period of poor returns.

Despite that, Shah told FE Trustnet in June of that year that he was going to “stick to his guns”.

The fund’s AUM shrunk from £2.4bn to £2.2bn between April and June 2012 and, given that the fund had lost 1.2 per cent and was down against the FTSE All Share at that time since Shah had taken over, it is easy to see why investors had lost patience.

Performance of fund, sector and index Jun 2012 to Jan 2014

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Source: FE Analytics

However, between June 2012 and January 2014, Shah’s contrarian call paid off and the fund was top decile with returns of 60.12 per cent – nearly doubling the returns of its benchmark.

Evan-Cook says that while it is easy to look back with the benefit of hindsight, not getting drawn into a trend is very difficult.

The manager says there is no finite way to make sure investors don’t fall into the timing trap, but he and his team attempt avoid it by simply scrutinising the price they have to pay and seeing whether a wall of money has gone in before them.

“I'd say check the valuation above everything else. The killer of every ‘holy grail’ investment is that it became too expensive then sold off, so if you get that right you won't go too far wrong,” Evan-Cook said.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.