You have a money-losing mutual fund on your hands, but you're sticking with it. Are you a sensibly patient investor or a patsy?Learn to know the difference and you can save yourself from losses in your portfolio that may take years to heal. Here's an idea of the mathematical logic in play here: If you invest $1,000 and lose 25 per cent, it takes a 33-per-cent gain just to break even.
Dealing with underperforming mutual funds is a matter that rarely comes up in the world of mutual fund companies, the advisers who sell funds and the analysts who rate them. You can fill a room with reports recommending various funds, but clear sell recommendations are virtually unheard of.
This disparity is partly a reflection of the fact that there's nothing more lucrative to fund companies and advisers than clients who buy and hold forever, thereby creating a continuing stream of fee revenue. But it also highlights how much harder it is to make a case to sell a fund as opposed to buying it.
As a mutual fund investor, you have to get a feel for assessing underperforming funds using mostly facts, but also a little of what your gut tells you. To show the way, let's look at some mutual funds that have done something you'd think would make them an obvious sell, which is losing money on average in each of the past five years.
Globefund.com analyst Tilly Cheung screened the universe of funds and came up about 400 or so that were under water for the five years to Oct. 31. Most are in the global, international and U.S. equity categories, decimated since the stock markets turned sour in early 2000, but several are in sectors like technology and the Far East and a few others are Canadian equity funds.
Is a fund an automatic sell if it's under water for several years in a row? Asked this question five years ago, most investors would have shouted "Yes" and pounded their fist on the table for emphasis. Today, the answer is not so clear.
One of the biggest funds on the list of five-year losers is the $3.1-billion Fidelity International Portfolio. Let's dissect it to see if holding it shows patience or passivity.
First off, you need to put it into context by looking at how other global equity funds have performed in the past five years. The answer, in a word, is rotten. The average loss over this period is a compound average annual 2.8 per cent, which compares with an average loss of 4.8 per cent for Fidelity International Portfolio. This fund is also worse than average in the past one- and three-year periods, but it beats the average in the past 10 and 15 years.
Now for year-by-year consistency. Here, the fund doesn't look too bad. It ranked among the top 25 per cent of funds, or in the top quartile, in two of the past eight years and in the second quartile in three of the past eight years. The remaining years were spent in the third quartile, meaning below average but not among the worst 25 per cent.
One reason you might want to hold on to a disappointing fund like Fidelity International Portfolio would be short-term momentum that suggests a rebound. Unfortunately, this fund's been a fair bit worse than average over the past one-, three- and six-month periods.
The way I read the data, Fidelity International Portfolio is a sell. But wait -- here's where gut feeling comes in.
