Would you sell Lindsell Train Japanese?

aroominyork

Mark Atherton's column in The Times last Saturday was titled "Don’t be afraid to show poor funds the red card" and opened "How long should you give a poor-performing fund manager before you get out a red card and banish them from your portfolio? Some experts would wait as long as five years before pulling the trigger, while Brian Dennehy from the research group Fund Expert said he would consider switching out after six months if performance was poor. “It’s important to remember that poor fund managers cost money, so you don’t want to be suffering that for very long,” he said. It is not just a question of the money you have lost with a particular fund, it’s the profit you might have made by picking a good fund rather than a failing one."

So would you sell Lindsell Train Japanese, which over the last six months (according to Trustnet) is the worst performing Japanese fund, down -0.6% while the next worst fund is up 6.5%?

I hold the fund and, if anything, see it as an opportunity to buy quality companies while they are cheap. If you hold it and would sell, why did you buy it in the first place and what triggers your decision? 

TBC15

Why did you buy it in the first place and what has changed?

Linton

You need to understand why the performance was poor.  What sectors is it investing in, or not investing in which have led to the situation?   A quick bit of research tells me that it has a very high % of consumer defensive  and a rather low % tech.  It also holds a significant amount in small companies. In the past 6 months I believe tech has been the main driver of the rise in global share prices.  I hold a Japanese Small Companies Fund and in recent months its performance has dropped from one of my best performers to one of my worst.  It seems to me that Lindsell Train is not "a poor performing fund" but rather it is performing in line with its investment strategy given what is happening in the markets.

Lindsell Train funds tend to be very idiosyncratic which you should have known before you bought it. So they are quite likely to behave differently to the rest of the pack. The other Lindsell Train funds adopt a similar strategy and have suffered in a similar way recently.

You should either buy the fund because you like its strategy or because its focus on particular sectors helped fill gaps in your portfolio.  And you should only sell the fund if it no longer met these needs.  I have no knowledge that the fund has changed.  Have your circumstances changed?  If not why sell? In 6 months time the economic climate may have changed to favour the Lindsell Train strategy.

aroominyork

TBC/Linton, was my final para not clear? It still meets my needs and I would buy more while it is cheap. I am asking sellers why they would sell.

TBC15

aroominyork said:

TBC/Linton, was my final para not clear? It still meets my needs and I would buy more while it is cheap. I am asking sellers why they would sell.

Good point no I don’t, I’ll get my coat

Thrugelmir

Sometimes what works well in one market doesn't in another.  Some years ago Anthony Bolton ran the highly successfull Fidelity Special Situations fund until 2007. In 2009 moved to Hong Kong and launched the Fidelity China Special Situations PLC. Needless to say it flopped. 

Buy the right fund for the right reasons and not the reputation. 

aroominyork

I think that's apples and pears, Thrug. I was just trying to see if anyone would justify ditching a fund after six months' underperformance. I think most of us see that as much too short a period, though an exception might be if the underperformance threw light on why the fund was a bad choice in the first place, eg having wrongly convinced yourself that a high risk fund which had had a couple of strong years would not suffer heavier declines than you could stomach. Anyway, perhaps this thread is not going anywhere useful. 

aroominyork

I'm guessing bowlhead gave a thumbs-up to my last post because I said it was not going anywhere useful, rather than for the preceding comment. If he does likewise to this post I'll know that is the case!

bowlhead2000

As the chap from II pointed out in the article, "Perennial underperformers need to be weeded out, but holding on to an underperforming fund may pay off when the market cycle changes". 

And while the author notes his own misfortune as a "stark reminder that you should never blindly hold on to an investment out of sheer force of habit", I wouldn't say that a decent track record from a particular approach to a market sector has all unravelled just because the market conditions didn't favour that approach for six months or so while markets were bouncing around. If the companies held aren't at ridiculous valuations (and assuming their values don't appear to be suppressed by company- or sector-specific issues that have little chance of improving) then there is probably no reason to now reject a fund you had previously considered to be the best fit for your needs.

Of course the proponents of passive investing may seize on the concept of, "an active approach may work for years, until it doesn't" as an example of why you should have been in a tracker all along, feeling that any previous outperformance was only due to luck or the taking of higher risks. A low turnover, high concentration fund that isn't heavily weighted to the biggest things in the index and only gives exposure to a few main sectors that they like, is quite likely to give a different result to TOPIX or Nikkei 225. 

By mid April, it was about 10% ahead of TOPIX YTD, though TOPIX eventually recovered from the March lows and caught up by early October. Simply due to the mix of companies held and the market's reaction to events affecting different sectors. For example, the fund's larger holdings in companies like Nintendo and Square Enix did OK in the March crash, falling less far and recovering faster than the average. Then, over the last six weeks TOPIX is up 5% while LT is down a similar amount.  So over the last six months or so you could say it has 'underperformed' by 20%, but that probably does a disservice to the fund, because the TOPIX only needed to catch up because of doing so much worse earlier in the year.

While the fund is now 10% behind the index year to date (which as you would expect does not put it in the top echelons of Japanese funds for the period), the fund is 10th out of about 60 in the IA Japan sector over five years and 22nd out of almost 70 over five.  It would likely be an overreaction to call this 'the beginning of the end' and dive for cover.

bowlhead99

aroominyork said:

I'm guessing bowlhead gave a thumbs-up to my last post because I said it was not going anywhere useful, rather than for the preceding comment. If he does likewise to this post I'll know that is the case!

Generally you won't get much disagreement with the idea that 6 months is not a meaningful enough time period to conclude that the strategy is failing unless other people using the exact same strategy to take exposure to the same types of businesess are succeeding spectacularly. 

When holding individual shares, it can definitely be worth keeping things under close review and bailing out if something starts to go wrong, because the company might fail entirely. Thus 'cut your losses and run your winners'. With collective investments however, that is not really a concern to the same extent, as even the more concentrated portfolios would be unlikely to have a huge percentage exposure to a company or industry sector collapse (and switching from one Japan fund to another would not save from a general Japan collapse). 

So by all means put the fund on some sort of 'watch list' after six months of it getting radically different results from its peers, but if it has a strategy of performing different to the index you can't blame it for giving a different result to the index, and likely more hindsight is needed to evaluate how and why the performance difference is negative.

AnotherJoe

Why would you buy, specifically, a Japanese fund (rather than why this exact one)? Do you also hold S Korean, German, China ,  Sweden, US, Canada etc etc funds?