Funds to fall in love with and funds to ditch this Valentine’s Day

With Valentine’s Day just around the corner, what better time to discuss the investments you might want to commit to or consider ditching

I am often asked what makes a good fund manager – or what makes a good fund, that you can buy and hold forever. Even more often, I am asked when investors should consider cutting their losses.

Nine times out of 10, experience is key. This is because a fund manager can show how their investment process works throughout the market cycle – in the good times and the bad.

Good managers will also have excellent knowledge of their area of investment and will use all the resources available to them. Some are good working alone or in a small team. Others are good when they have a big team to support them. That is very much down to the individual.

A good fund manager will also be consistent in their process, even during periods of underperformance. Tweaking or maturing a process is good. Deviating a long way from it is bad.

I find that good managers also tend to stay with the same company for long periods of time. They have consistency in their working environment and haven’t swapped and changed too much or too often.

When it comes to a good fund, it is important to understand the process and what the manager is trying to do. Never pick a fund just because your best friend or parent has invested in it, or because it’s the one you see mentioned all the time. Different funds will suit different people and help you meet different goals – so make sure it is right for you.

A couple of good examples are Royal London Corporate Bond and Liontrust UK Smaller Companies. Jonathan Platt, who has run the Royal London fund since 1999, has always had a knack of finding unrated bonds that other managers overlook. He has outperformed his peer group in 17 out 20 calendar years.

Anthony Cross has run the Liontrust fund since 1998, developing his own process that has not only worked successfully on this fund, but also on other UK equity funds the manager has subsequently launched. It is repeatable and reliable.

I rarely invest with a brand-new fund manager or new fund, but there have been a few exceptions to this rule over the years. One such example is Alex Savvides, manager of JOHCM UK Dynamic. Alex has shown himself to be a very talented and determined investor. Having joined JOHCM in 2008, he designed the fund himself and has run it since its launch, managing to be consistent in all market conditions. The fact that he designed the fund himself and has a clear process, which he lives and breathes, really caught my attention.

When you might want to cut your losses

As with relationships, there is no hard and fast rule when it comes to breaking up with an investment. It is very much on a case-by-case basis. But there are a few warning signs to look out for.

First, if the fund has undergone a prolonged period of underperformance, it could be time to call it a day. Sometimes we are too quick to switch – all managers will have bad patches and many will recover – and sometimes we are too emotionally attached to an investment to see clearly when we should cut our losses. A good question to ask yourself is: “If I was looking at the fund today as a new investor, would I still invest in it?”

Another sign is if a manager is not sticking to their investment process or has altered their style for no good reason that you can understand. This is usually a sign that something is up – again, ask yourself: “If was investing today, would I be comfortable with this manager investing this way?”

Sometimes a fund can get too big. This is especially the case if a manager runs a smaller companies fund. If they take on too many assets, they have to either take bigger bets in companies by owning larger percentages or they have to start investing in larger companies instead. If these changes have to be made, the fund is moving away from its process and could impact future returns.

At other times, the fund manager might change. If they have done a good job for you in the past, you may like to follow them to their new fund if that is an option. Or you might want to wait and see how the new manager does. If the previous manager was not doing so well, the new one may equally rekindle the spark in your investment relationship.  

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views and those of the investment professionals quoted are their own and do not constitute financial advice.

Darius McDermott is managing director at Chelsea Financial Services and FundCalibre