Seven signs it might be time to ditch an asset

So, you’ve built a portfolio of investment Assets

We know that not all investments turn out to be excellent - that’s why we diversify, How do you know which investments to prune out? Here, we look at a range of scenarios and suggest whether they’re enough to give your investment fund the boot or if it deserves another chance to deliver as expected.

One: Your objectives have changed

Let’s kick off with one that has nothing to do with either your chosen fund, its manager, or the returns they’ve delivered. For example, you may have invested in a riskier emerging markets fund but decided you dislike volatility as you’ve become more risk-averse. Your original investment thesis – and subsequent choices made – may no longer meet your needs. If this is the case, then it’s definitely time for a change. It will require you to be very clear about your investment goals and attitude to risk, as these will dictate the most suitable asset mix for your needs.

Two: Short-term performance

Short-term poor returns don’t necessarily mean they’ve become a bad asset overnight. There are plenty of reasons why performance may have dipped. For example, the investment style may have fallen out of favour. It might focus on smaller companies at a time when the market is in love with mega sized stocks. Conversely, the portfolio might be packed full of innovative technology names at a time when solid, reliable dividend payers are in high demand. Either way, an asset shouldn’t be axed for one bad quarter – unless there are more extreme circumstances…and we’ll explore those shortly.

Three: Persistent underperformance

A few bad quarters aren’t normally enough to ditch a manager, but persistent under-performance is a different story entirely. If a manager is consistently under-performing the market and similar funds, it’s time to find out what’s going wrong and make the necessary changes. The biggest red flag is if a manager’s investment style is in favour yet they’re still under-performing, particularly if rival funds are doing well.

Four: Style drift

This is when a fund manager has changed their focus. For example, you may have bought into them as large-cap investors, but now they’re buying smaller stocks. Similarly, you may have been drawn to their defensive qualities, only to see the portfolio’s volatility spiking on the back of questionable investment decisions. This is concerning, as you may have selected their particular fund to fulfil a role within your overall portfolio, and if it has undergone style drift, it’s likely no longer suitable. When this happens, it’s time to revisit your investment objectives, ensure they’re the same, and if so, look for a replacement fund.

Five: Manager departures

The fund’s very experienced manager, who has been at the helm for years, has left. Should you move your assets? The quick answer is not immediately. It all depends on why they’ve left – if this is known – and who is taking over the hot seat. If it’s the deputy manager moving up the ladder who wants to retain the status quo, then the fund performance may well continue, although it’s worth monitoring. However, if it’s a new recruit, you’ll need to keep a close eye on the fund to ensure there aren’t any significant changes that affect its performance.

Six: Rising costs

Charges levied by funds are often overlooked but can have a detrimental impact on returns. Therefore, a sudden increase in them must not be ignored. Another red flag is a lowering of the hurdles required to trigger performance fees. You’d need to ask why this was happening and what incentive there is to deliver strong returns. Even if costs haven’t increased, you don’t want to be paying high charges for average returns, so find out exactly how much you’re paying. Compare these fees with those of similar funds to see if it’s worth making the switch.

Seven: Assets under management

Our final suggestion is another sign to monitor, rather than immediately selling. This concerns the amount of assets under management. If investors have been withdrawing money rapidly, then it’s time to ask what’s going on and consider whether you need to follow in their footsteps. Conversely, a fund’s strategy may have worked perfectly when it had $400 million of assets, but is the investment process still practical if it becomes a multi-billion-dollar giant? Suddenly, large inflows can change the whole look – and overall dynamic – of a portfolio if its manager is under pressure to find a home for the new cash injection.