Investors are too quick to sell out of underperforming funds and in most cases end up losing more money than if they’d weathered the storm and held them, according to Mark Dampier (pictured). 
The research director says that investors place too much emphasis on every holding in their portfolio outperforming the current market when actually, he says diversification and a long-term time horizon are far more important factors.
As such, he holds a number of underperforming funds that have seen significant outflows over recent time frames including Kevin Murphy and Nick Kirrage’s Schroder Recovery, William Littlewood and Kartik Kumar’s Artemis Strategic Assets and Tom Dobell’s M&G Recovery.
The latter has caused a particular stir among investors because of the manager’s previously strong long-term track record, although significant underperformance over three and five years has dragged the fund into the bottom quartile over the last decade.
An FE Trustnet article published last August pointed out that one of the reasons investors have been particularly disappointed by M&G Recovery’s performance is that the market has been in “recovery mode” over recent years. While funds such as MFM Slater Recovery, Fidelity UK Opportunities and L&G UK Special Situations have delivered top-decile performances over one and three years, Dobell’s fund is bottom and third-from bottom over these time frames respectively out of every fund in the IA UK All Companies sector.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
Despite this underperformance though, Dampier says he often has debates with clients when it comes to holding the fund, and points out that investors should be more concerned if every holding in their portfolio is outperforming the market at the same time.
“Loads of people are laying into Tom Dobell about M&G Recovery at the moment which I can well understand as it’s not exactly been great and some of that is his own fault, but some of it is that the market is not interested in the sorts of stocks that he holds,” he said.
“I would be the first to agree that it has been absolutely awful over the last three or four years, but I’ve had other investments that have more than compensated for that. I think investors are way too quick to change and move when they should just sit on a lot of their holdings.”
While the fund has underperformed in each of the last five calendar years, it must be noted that Dobell’s deep-value style has led him to have high weightings in commodity-related stocks which have been hit by various headwinds.
Other examples the research director gives of funds that investors are too quick to sell out of include defensive ‘all-weather funds’ such as Iain Stewart’s Newton Real Return and FE Alpha Manager Sebastian Lyon’s Troy Trojan fund.
He says that investors often pile into these funds while they are outperforming in falling markets but will sell in rising markets as they tend to underperform their peers in these sorts of environments.
“The problem with investors is they want every fund in their portfolio working for them. They want every fund going up, and the arguments I’ve had with investors is that, when I put a portfolio together for a client, I put a number of different things together from different fund managers,” Dampier explained.
“What actually happens though is investors buy them once they’ve shot up by 80 per cent. My point would be to have some M&G Recovery in your portfolio because it’s doing something different. Funds underperform when the market isn’t interested but at some stage, as I’ve seen before, the market suddenly becomes interested and they shoot up.”
“I can’t tell you when its performance is suddenly going to change, but to my mind it’s worth having in your portfolio.”
Another factor that causes investors to sell out of perfectly good investment vehicles and therefore lose money, according to the research director, is fear-inducing headlines surrounding macro themes such as China’s growth slowdown or the plummeting oil price.
He says that not only does this encourage snap investment decisions based on short-term time horizons, these bearish portrayals of the global economy from the media don’t provide investors with any solutions in terms of how to play these markets.
“Media - if you’re talking about newspapers - are there to sell newspapers. They don’t sell newspapers by saying things are okay,” Dampier continued.
“There are two things that sell: either someone comes out and says the Dow [Jones] is about to hit 40,000 in the next couple of years and everybody writes it up, or someone says it’s going to move down 75 per cent and the media writes it up.”
“Let’s be frank, with most of these forecasts everything usually muddles through somewhere in the middle. Occasionally someone gets it blisteringly right but that’s like winning the lottery. I just don’t work on that basis and I find it interesting that you read a lot of these articles or commentaries but they don’t provide a solution - if someone is going to bring me a problem, bring me the solution as an investor.”
He also points out that numerous bear stories have reared their heads over the last five years, despite the fact that the FTSE 100 has climbed from around 3,500 points to highs of 7,000 last year. He adds that the MSCI World index is also up significantly since the throes of the financial crisis despite fear-mongering from a vast majority of financial publications.
Performance of indices since 2008
Source: FE Analytics
“What I would say is I think this is the toughest time that I’ve ever known for investors. I broadly do think it’s very difficult to see through what has basically been a huge financial experiment and I’m not so naïve and complacent to think that we haven’t got all of these macro problems,” Dampier said.
“What I just can’t see is how people can adamantly say ‘this will happen’. Most predictions are effectively a waste of time. You’re far better to just get on with what you think are good solid companies and ride through most of the macro stuff in my view.”
“In the meantime, make sure you’ve got plenty of cash available – as I would always say - for your emergencies. Most people should position their portfolio and then go out and play a round of golf or go fishing or skiing, do something that they like, and just stop reading so much.”
