Active managed funds plummeted - what would you do?

older_and_no_wiser

As background, I am 54 and planning to retire in around 4 years debt and mortgage free. FSP at 67. I am single with no dependents. No requirement to leave any legacy. My annual living expenses will be around £15,000.

The core of my pension and savings portfolio is all invested in passive global trackers and multi-asset funds. This totals around £350,000 currently with £30,000 in high(ish) interest paying savings.

 I took the decision to invest in some satellite managed funds about 18 months ago. This was around £100,000 (on top of the value mentioned above). These funds are:

Schroder UK Smaller Companies (currently down 29%)
Marlborough UK Micro-cap (currently down 29%)
BG Emerging Markets (currently down 23%)
BG American (currently down 49%)

At the time, all were performing well as that was the top of the market. I felt that with global trackers and multi-asset funds, I had little UK and emerging market exposure, so thought I would take a punt by investing in managed funds that specialised in this area. I also felt that the UK would bounce back in the long term and wanted to hone in on that. I've since learnt that over the long haul, managed funds really don't outperform global trackers. BG American was a complete mistake. I regret it every day. I bought this at the wrong time with so little knowledge of investing. I have learnt so much since that day though!

My question is; should I crystalise the losses, cash those managed funds in and put the money into my core funds? 

My head says no to that question - as I will remain invested in retirement and won't need to touch those funds for at least 20+ years - if ever! Another part of me is thinking that those funds may never recover and I'm best cutting my losses now and the sooner I do it the better. In addition, I still believe the UK will perform in future, but that future is further away than I thought 18 months ago.

I am interested to hear what others think they would do if they were in the same position. 

Rheumatoid

I would do nothing

jaypers

I haven’t researched your particular funds but in general the rationale of crystallising losses is a bad move unless you have evidence and/or good evidence that the investment in question is really in trouble and things are likely to get worse. Generally the advice with investments is to sit tight. Markets are still very volatile but there is some light. Interest rate increases look like they are starting to slow down off the back of a predicted reduction in inflation at last. The threat of course is the global recession on the horizon, however markets generally don’t do as badly as you might expect during times of recession.

With upcoming retirement, it’s difficult and you should start to move to a lower risk profile when you are starting to think about drawing a pension etc. 

My advice would be perhaps to consult an independent financial advisor, if you haven’t already done so, and try to plan out some scenarios and potential actions. 

masonic

I have some high risk satellites in the same sectors whose performance hasn't been great either - about 10% of my portfolio (before they fell). I still believe in the investment case for my funds, so have rebalanced and topped them up. The other option would have been to leave them at their current level. I would only have sold them if I felt they were unsuitable going forward, not as a result of short-term performance.

NoviceInvestor1

Buying what is top of the performance table at the peak of the market is a surefire way to give yourself some tough decisions later down the line unfortunately.

What a lot of people do is buy what's top, wait for it to crash, sell it and buy what's top, wait for it to crash, sell it and buy what's top etc. Which destroys wealth.

So I'd question do you really want to sell low and buy high? Do you not like any of these funds more now they are a third to half the price you were willing to pay?

It's a tough one - in most walks of life something being 50% of the price you were previously willing to pay for it is a good thing.... 

Personally I have no time for Baillie Gifford and sold my holdings at the end of 2020/start of 2021 - I just don't like the house approach (aside from SAIN which is a good IT).

Do you think UK small caps is a good bet still? UK seems a complete mess to me....

Albermarle

 I took the decision to invest in some satellite managed funds about 18 months ago.

Basically your timing was unfortunate, plus all the funds are high risk. Perhaps with hindsight, you could have been less gung ho in the satellite funds you picked, and maybe gone for more diversification from equities, like property or infrastructure, or commodities.

Anyway what is done is done, and I would think it is best just to leave them alone, and hope that at least two or three of them recover in time. 

On the positive side, you have around £450K in your pots. In 4 years time , if you are still adding to your pot and with just a modest market upturn, you will be retiring with over £500K, hopefully more. With your very modest expenditure of £15K pa, you should have no problem with money. Even if it was £20K pa .

older_and_no_wiser

Thanks for the replies so far. Very helpful. I don't feel a financial advisor would add much apart from maybe reassuring me. I understand though that reason is enough for some people and makes it justifiable for them.

I have planned and mapped out my retirement future and been through various scenario calculators as well as compiling spreadsheets of future years income and expenses using different inflation and returns figures. I don't feel an IFA could add anything apart from maybe tax efficiency in retirement which I've still not got my head around. However I'm not ready for that point just yet. I will revisit that before retirement!

older_and_no_wiser

Albermarle said:

 if you are still adding to your pot and with just a modest market upturn, you will be retiring with over £500K, hopefully more. With your very modest expenditure of £15K pa, you should have no problem with money. Even if it was £20K pa .

Thanks so much for that. I had figured the same. I am still contributing £1500 a month via workplace sal sac pension and also adding over £1000 a month into savings and investments (global trackers!). 

ColdIron

I have the Schroder UK Dynamic Smaller Companies Fund (held since it was Cazenove UK Smaller Companies Fund) and have no intention of selling it (it's still up 60% for me). Small caps are generally expected to outperform large caps given time but are higher risk and will be more volatile as we see now. With a 20+ year horizon I believe it will have its day in the sun again (the zigs will make up for the zags)

JohnWinder

Keep your nerve and plot a sensible course for the coming decades. Here are some observations.

The funds you listed look to have high costs compared with what else is available in those sectors, and since you might have 30 years investing ahead you could do some modelling of the compounding ‘losses’ that come with higher costs.

I worry that ‘core and satellite’ investing (passive core, active satellite) is a marketing strategy to contain the losses the industry has been sustaining (to the benefit of investors going ‘passive’), by hanging on to as many people subscribing to active funds as possible. The arguments behind it seem thin to me unless you’re up for a bit of a gamble. 

Give up the ideas exemplified by your ‘I still believe the UK will perform in future’ and other similar ‘predictions’. No one knows, least of all little nobodies like us, what the future or its distant relative is, so don’t invest on that basis: invest at market cap weighting. That said, ‘cap weighting’, I don’t think it’s a hanging crime to leave out emerging markets or small cap. EM might be 15% of global, which drops to maybe 8-10% of your portfolio if your bond holding is modest. Ask yourself how much more EM is likely to return you than developed market, after you take into account the extra investment fees. Were the returns to be 1%/year greater, take off 0.5% for the extra costs, and you’re left with an extra 0.5%/year of 15% of your equites which are 70% of your porfolio ie 0.5% x 15% x 70%year = 0.05%/year.  Nice enough to have, but EM has underperformed developed by more than 1% over the last decade, but outperformed before that, and over the last 25 years been the loser. Is it worth chasing 0.05%/year when that’s what happens. If EM is part of a global tracker, fine, but separately, why bother? The same argument applies with small cap.

You seem to have some regrets about your active fund choices. Surely you minimise the opportunity for regret by going for market cap weighting, and either forgoing the ‘special’ sectors like EM or SC, or getting them in just one big fund? Then you can’t blame your choices for bad returns, only blame your asset allocation vis a vis bonds and you make that choice eyes wide open to volatility and risk.

I’d guess your equity allocations are not too far off market cap, eg your EM is a quarter of 30% for you. So you can keep the actives on that basis. Now explore whether those actives are doing much worse or similarly with a suitable index; if similarly, you can get out and into a cheaper passive fund without significant disadvantage, and you’re saving on fees for 30 years. If they’re well down, they could well turn around and be good performers (that’s in the nature of active funds); that’s when you bail out ASAP. And again, then either replace with cheaper trackers or get them in a big fund, or forget that sector. Good luck.

Linton

I dont think this is an active vs passive question but rather one of asset allocation within an equity portfolio.  To make this work in my experience you need to decide up front what %s you want in various market sectors and then buy the best funds you can to meet those %s.  Having set up your portfolio just leave it, perhaps with rare rebalancing if the %s drift too far.  What happens to individual sectors does not matter.  They will each behave differently at different times.  What matters is the portfolio as a whole.

Determining the "best" fund should not be not based simply on which has provided highest performance but requires some detailed research into the nature of the funds.  Morningstar is a key resource here.  It will tell you the structure the fund in terms of countries, sectors (eg tech), the size allocations, and perhaps most importantly, the Value/Growth ratio.

Value represents  stable and profitable reasinably priced companies and Growth those companies which are mainly priced on possibly unrealistic future expectations.  Getting the balance right is a major factor in deterimining the volatility of your overall portfolio.

If you had researched your chosen funds BG Americal should quickly have been flagged as very high risk.  In particular morningstar shows 72% Growth, 25% "Blend" and 1% Value.  So wildly growth oriented.  Its sector allocation shows 31% Tech 23% Healthcare (I guess this is drug development rather than US hospitals) and 12% Communication Services (spun out of Tech a while ago to cover things like Netflix and the mobile phone networks). Many BG funds are of this type though not to such an extreme degree.  For most of the period since the 2008 crash they performed very well.  However times change.

In my view this level of research is essential  if you are not to end up choosing inappropriate investments and it can be both interesting and rewarding.  But if this is not how you want to spend your time I suggest you stick to broadly based index funds,