Cutting ties with any holding is one of the most difficult decisions an investor can make, but chopping a winner is even more difficult.
This week, fund shop interactive investor (ii) announced it was placing the £1.3bn Syncona investment trust under review after a disappointing year, despite impressive longer-term returns.
It was formed through BACIT’s acquisition of the Syncona life sciences portfolio – which was an independent subsidiary of the Wellcome Trust – in December 2016.
Dzmitry Lipski, head of funds research at interactive investor, said that although the trust was run by a “highly capable” management team, there had been too many changes that could not be ignored.
“In keeping with our stated methodology, we can’t ignore the fact that the trust has been very volatile in both share price and premium terms, and posted negative returns year to date, which has also damaged its three-year track record,” he said.
The trust has lost 14.3% over the past 12 months, the worst performance in the IT Biotechnology & Healthcare sector over this time. The average peer has made a 7.4% gain.
A large part of this has been due to the premium, which has narrowed from around 30% at the end of January to 10% currently.
The trust has now lost 16.3% over the past three years – again, the worst in its sector. On average its rivals have made a profit of 24.9%. However, over five years it remains the second-best performer in the sector, having made 75.7%, 9 percentage points more than its peers.
Total return of Syncona versus the IT Biotechnology & Healthcare sector
Source: FE Analytics
As the chart shows, the trust has also been volatile. It has the highest maximum drawdown in the sector of 27.4% and the second-worst score for volatility (23.6%).
In its defence, it is labelled as ‘adventurous’, which according to ii’s methodology means it is likely to be “higher risk and return”.
Lipski said: “We will be conducting a formal review to assess whether the trust continues to be appropriate for our investors and be included in the ACE 40 best ideas list.”
Ben Yearsley, co-founder of Fairview Investing, said short-term performance should not be used as an indicator for whether or not to sell a fund.
“I would rarely look at performance. This might come into my decision making down the line but I am prepared to be patient. It would not be a key driver in whether I chopped a fund,” he said.
“That seems very short-termist, but if the decision has been made because the trust has been more volatile than expected, then that is a valid reason to review it.”
Lipski also noted a change in management at the trust. Former chief finance officer John Bradshaw retired in July, replaced by Rolf Soderstrom, while the management team was also expanded with a new chief medical officer and chief human resources officer.
Yearsley said this was much more likely to be a catalyst for change, adding that a change in management should be a big factor for investors.
He noted that this could also include a change of parent company, if a firm were to be merged with another.
Other factors to look for include a change of mandate, such as that of Neil Woodford. The former star manager ran his own fund group, but was eventually shut down after being suspended for owning too many hard-to-trade, unlisted companies.
“A key warning sign would be a big deviation from the initial mandate. Neil Woodford is a classic example of this. Although the name said it was an equity income fund, by the end it was not,” Yearsley said.
Size can also be crucial, he argued, as companies that become too large can change the way they invest. Smaller companies funds, which are supposed to invest in the market minnows, could be forced into mid-cap or even large-cap stocks if they become too large.
Finally, a change in fees should also trigger a review. This could be that a fund has increased its charges, but should also factor in rivals as well.
“The market has moved on. New bond funds launching now cost 40 to 50 basis points, but an older fund will be charging a lot more,” Yearsley said.