Growth fund question

Paulrm71

I invested in the Axa biotech fund just over a year ago and as of today its up 66%. It does not appear to pay any dividends so looks like a pure growth fund.

Apart from keeping to a certain asset allocation limit, is there any point in keeping any profit over and above the original asset allocation?

Nobody can predict when the next correction might happen whether its the tech sector or a wholesale correction, so would there be an argument to crystallise the biotech profit and reinvest it across some of my other funds?

meanbean

I'm not sure what 'asset allocation limit' is but isn't Axa Biotech an accumulation fund i.e. your profits will be reinvested and your shareholding - and associated gain should it continue - grows? Isn't that the benefit?

Paulrm71

I have the Inc version and no dividends have been paid out.

meanbean

This link (inc, accumulation) suggests it is a bi-annual divi payout, payable at the end on April?

BrockStoker

The Axa Biotech fund comes in two flavours: Accumulation and Income.

If Paul had the Income version then there should have been a dividend paid to him, but it sounds like he had the Accumulation fund which reinvests the dividends back into the fund automatically instead of paying out a dividend.

collingbone614

If you are at a point where you are re-balancing your portfolio and this fund has grown considerably out of line with the asset allocation you had planned, you could at this point sell some of the units off it and use the money to buy units in the funds which are lagging behind their allocation.

meanbean

Or this link for the income inclusive version of the fund

Thrugelmir

Paulrm71 wrote: »

I have the Inc version and no dividends have been paid out.

How many of the underlying investments are actually profitable, commercially viable and generating income for shareholders?

Or is the value in the future potential of these businesses?

bowlhead99

Paulrm71 wrote: »

Nobody can predict when the next correction might happen whether its the tech sector or a wholesale correction, so would there be an argument to crystallise the biotech profit and reinvest it across some of my other funds?

'would there be an argument to...' implies it is not the standard thing to do but is an idea that could have merits. But in this case actually that's the standard natural thing for most people to do.

Imagine you have £100000 portfolio and you had 10%(10000) of biotech within it. Now everything in the overall portfolio has gone up, on average, 16.7% to 116700 while biotech itself within the portfolio went up by 67% to 16700.

If you look at the 'new' portfolio, 16700/116700 is now in biotech. So if it still true that you think you would like to have a tenth of your money in biotech you are quite overexposed because actually one seventh of your entire portfolio is now in biotech.

So yes some seling is probably necessary unless you can think of a great reason why a seventh of your portfolio should now be in bio instead of just a tenth. Remenber if you wait until market forces take the 16,700 value back to 10,000 on the next bit of bad news, it's a loss of 40% of that part of your portfolio which is a lot to give up, even if you are thinking of the gains as 'free money'. Presumably you would rather keep some of this free money rather than give it back.

Apart from keeping to a certain asset allocation limit, is there any point in keeping any profit over and above the original asset allocation?

If you scaled back your holding to 10% of your current level of assets you would want 11,670 in bio now , of the new enlarged 116700 portfolio. So, you would be keeping some profit but cashing in most of it and buying more of the assets which had not performed so strongly.

You might feel that 10% in bio is too little and actually 12-15% is better. In which case don't sell as much. But if that is the case ask yourself why you were so off with your decision on appropriate allocation last year and how you know you are right this time. Remember the more you have in a specialist niche sector, the more you stand to lose when that judgement call turns out to be a bad one.

The above is an example of why you should probably not rebalance every day or every week. Assuming straight line growth, the fund grew on average rate of 0.98% per week which compounded up to 66% after a year. If you had taken the profit out every week and only ever kept 10,000 invested, you would have simply got 52 x 0.98% which is 51% after a year. By allowing the discipline of 'running your winners' for a year you got 10,000 x 1.0098 x 1.0098 x 1.0098 and so on for 52 weeks; rather than 10,000 + (10,000 x 0.0098) + (10,000 x 0.0098) and so on for 52 weeks.

So there is some logic in letting the assets do what they will for a year, instead of interfering. But as they grow you need to be aware of how skewed your portfolio is getting towards certain well performing sectors and the concentration risk that this represents; a rebalance every 6-12 months is quite normal.

As an aside, whether the companies within the fund pay a dividend that covers the management fee allowing a distribution to investors, or simply focus on growing their enterprises and spending their profits (if any) on R&D - should not impact your decision to rebalance. It is a red herring. Either the fund is at the right weight in the portfolio or it is not. If it is not, sell some or buy some until it is.

If you get income paid in cash back into your account you are naturally taking profits off the table to buy other things with the growing cash pile. But even if it paid you 2% divs and gave 64% growth, instead of 0% divs and 66% growth, you would still need to sell some units once you get a big overexposure to the sector.

Paulrm71

Thanks Bowlhead for taking the time to comprehensively reply, I now have a better understanding.

Radiantsoul

Thrugelmir wrote: »

How many of the underlying investments are actually profitable, commercially viable and generating income for shareholders?

Or is the value in the future potential of these businesses?

Quite a few! The top 4 holdings having market caps of around $100bn and all generate profits.