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By Paul DeLean
Montreal Gazette
Investing Strategy
Saturday, July 02, 2005
Pulling the plug on underperforming stocks or mutual funds is not an easy call for the average investor, especially if there's a loss and/or penalty involved.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, “Nobody likes to admit I picked the wrong horse. But you have to heed what the market is telling you.”
But some sleeping dogs never wake up, and you’re not doing yourself any favours waiting for it to happen.
This week, I bit the bullet and jettisoned from my portfolio two mutual funds that have been chronic laggards.
Maybe they’ll start going up now. I don’t care.
The mere sight of them in the portfolio statement each month had become a recurring irritation, a symbol of futility.
They changed names, they changed managers, and nothing seemed to work. Good markets or bad, they went nowhere.
A check on their management expense ratios (MER) during one of my periodic performance reviews this week was the last straw.
The funds, one European, one global (the names aren’t important) both had annual fees in excess of 3%.
For that, the managers of the European fund delivered a five-year return through May 31 of 8.41% a year (four points below the category average) and the global fund produced a five-year return of 6.31% (almost three points below average). The European fund was in the third or fourth quartile every year from 2000 to 2004. The global fund was there four of the last six years, including three in the bottom quartile.
Fortunately, they weren’t my only funds. Others have done quite well.
But like a lot of Canadians who made their first mutual fund purchases in the 1990s, often on the say-so of an adviser, I’ve learned the hard way they’re not sure things, and “buy and hold” doesn’t always reward the holders as much as the sellers.
How did I end up with the stinkers?
At the time, the global fund appeared to be the best of a limited choice of alternatives in a fund company that my adviser had put me into years ago. My initial purchase in that family bought on his recommendation was a fund coming off a great year it never came close to duplicating. After years of indifferent returns, I started looking for options that I could switch to without a penalty. Nothing stood out, but since the foreign content in my RRSP was rather light at the time, I chose the global fund. The only consolation is that the results would have been even worse if I’d done nothing and stuck with the original fund.
The European fund had been purchased after I interviewed the manager when she visited Montreal. She struck me as one of ’the brightest people I had encountered in my years on the business beat.
Obviously, she struck other people the same way. Within months of my purchase, she was hired away by another firm. Not that my fund company made any effort to notify me or other unitholders.
I only found out when the annual report arrived in the mail, and her photo had disappeared. It’s one of the risks the mutual fund industry downplays, that the manager you thought you were getting takes a hike.
In retrospect, I probably should have taken action then.
But selling is never easy for non-professionals. Like so many other investors with dogs, I hung on, wishing and hoping. For six years.
That’s not unusual, says Adrian Mastracci of KCM Wealth Management, a fee-only investment adviser. “Nobody likes to admit I picked the wrong horse. But you have to heed what the market is telling you.”
While there’s no foolproof formula for selecting funds, Mastracci said investors can help themselves by setting a few guidelines beforehand — including the point at which they’re prepared to intervene if their fund begins to sink, and what they’ll do then (for instance, sell half the holding if it drops 25%).
“Protecting the downside, is where people fail the most,” he said. “It’s not pleasant to contemplate, but you should draw your line in the sand.”
Indecision, emotion and lack of close monitoring all work against effective money management, Mastracci said.
“Don’t get attached to what you buy. They make lousy partners.”
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