The Times - UK (2020-11-14)

the times | Saturday November 14 2020 1GM 67

Money

H

ow 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.

Fund Expert’s research since 2004

suggests that once a fund picks up a

head of steam over six months it is

likely to outperform over the next six

months, but no longer. So you need to

monitor closely and take action when

a winner turns into a loser.

Stephen Yiu, the manager of the

Blue Whale Growth fund, is also

pretty tough. He said investors should

not be afraid to drop the many poor-

performing funds. Over the past three

years about two thirds of the funds in

the global sector have failed to match

the performance of the MSCI World

index, so Yiu would give them a

watchful yellow card. His fund

returned 66.6 per cent and is 17th

of the 292 funds. Over five years, 150

of 250 funds returned less than the

MSCI World index — worthy of a

sending off.

Teodor Dilov, from the fund

platform Interactive Investor, said a

manager’s performance should be set

in the context of market conditions.

“You wouldn’t hold the

underperformance of a value-

oriented fund [the art of buying

stocks that trade at a significant

discount to their intrinsic value]

over the past five years against the

manager, because the environment

has not been conducive to the value

style,” he said. The best strategy for

long-term investors is often to do

nothing, but maintain their portfolio

of investments, he added (clearly a

man after my own heart). Perennial

underperformers need to be

weeded out, but holding on to an

underperforming fund may pay off

when the market cycle changes.

Ryan Hughes from AJ Bell said that

a cut-and-dried approach could be

costly, citing the example of Anthony

You cannot pinpoint

the right time to sell

underperformers. Focus

on the fund manager

Bolton, regarded as one of the most

successful investors lately because of

his success with the Fidelity Special

Situations fund. Between 1989 and

1991 Bolton underperformed,

lagging the FTSE all-share index

by more than 34 per cent. He also

underperformed in his sector, the

UK all-companies.

Hughes said: “In this day and

age he would be castigated as a bad

manager and people would say that

he should be fired. However, he then

proceeded to outperform the market

in 11 of the next 16 years, beating the

all-share index by 180 per cent.”

Hughes said the now seemingly

invincible Scottish Mortgage

investment trust suffered a very bad

patch between 2008 and 2013, but it

performed outstandingly over the

next seven years. This, he argued,

highlighted that you cannot pinpoint

the right time to sell after

underperformance. Instead, you

should focus on the fund manager

and how they invest compared with

the broader market.

Growth investing is a strategy

that focuses on companies expected

to grow at an above-average rate

compared to the market, even if their

price appears relatively expensive.

Hughes said: “Anthony Bolton

was a value investor who did well

when value outperformed. Scottish

Mortgage managers follow a growth

strategy and have done well when

growth has outperformed. We’d all

agree that neither were bad managers,

but in this age of instant gratification

and lack of patience, investors are

very quick to pass judgement.”

I heartily endorse that view. The

idea of constantly chopping and

changing funds has always seemed

anathema to me. I echo Philip Fisher,

the celebrated US investor, that if the

job has been correctly done when an

investment is bought, the time to sell

it is almost never. I have held many

of my investments for more than 10

years and some for 20 or 30 years.

My experience with losing money

in Japan, however, which I wrote

about last week, is a stark reminder

that you should never blindly hold on

to an investment out of sheer force of

habit. That experience forced me to

sell a serial underperformer. It was a

tough decision, but I don’t regret it.

Don’t be afraid to

show poor funds

the red card

Mark

Ather ton

Activist Investor Turning it around

1990 1994 1998 2002 2006

0

200

400

600

800

1,000

1,200

FTSE

all-share

index

Fidelity

Special

Situations

tax-free to nominated beneficiaries if

you die before your 75th birthday. The

pensions annual contribution allow-

ance is usually £40,000 or 100 per cent

of your UK earnings, whichever is low-

er, unless you earn more than £200,000

a year, after which it gets complicated

and your allowance is reduced.

For those already maxed out on

allowances there are venture capital

trusts (VCTs) and enterprise invest-

ment schemes (EIS). VCTs provide

funding for early-stage private compa-

nies with the potential for long-term

growth and offer 30 per cent income tax

relief on investments of up to £200,000,

assuming it is held for five years. All

capital gains and dividends are tax-free.

EIS shares allow you to claim back up

to 30 per cent of the value of an invest-

ment as income tax relief. These are

also investments in early-stage compa-

nies. There is no minimum stake, but

most investment managers will expect

you to put in at least £10,000.

You can buy a maximum of £1 million

worth of EIS shares in a year. Dividends

are taxed, but not capital gains, and you

can write off losses against other taxes.

The average VCT has delivered a

140 per cent total return over the past

decade, according to the Association of

Investment Companies.

£20,000 a year into Isas and has

spent a lot of time on the phone

to his financial adviser this week

trying to come up with a new plan

in light of the Office of Tax

Simplification report.

Jack, above, is thinking of

enterpise investment scheme (EIS)

or venture capital trust (VCT)

investments, or a new pension.

“I understand the rationale behind

raising CGT after the spending

during the pandemic. But I think

that if these changes come into

effect, the Treasury will have to

do a much better job of explaining

the tax-efficient investment and

savings opportunities, such as Isas

and pensions. Many people just

don’t understand what’s available,

or know the risks.”

we work hard, and will be helping

to pay for the recovery from the

pandemic despite being past

retirement age. The government

could pay a political price for

punishing its own supporters.”

J

ack Taylor, 30, from Islington in

north London, would be highly

exposed to any rises in CGT

rates, having begun investing when

he was 18.

He bought shares in Apple at $25

in 2008, a few months after the first

iPhone went on sale. The price is

now $119.21. Jack, who works for

a technology start-up, also bought

early in Amazon, Tesla and Virgin

Galactic, and has made profits that

“run into hundreds of thousands”.

He already puts the maximum of

P

eter and Carole Coates, above,

from West Yorkshire have

about £300,000 in shares and

for ten years have rented out a two-

bedroom bungalow near their home

that Carole, 66, believes has gained

in value significantly.

Peter, 68, is a saddler who repairs

and makes horse harnesses. The

couple — who choose to work past

retirement age — also own a horse,

Monty, and take part in ploughing

matches across the country.

They are dismayed at the

proposed rise in CGT, which would

affect them when they come to sell

their rental property or cash in their

shares.

“We have several neighbours

who rent out properties too. We

are natural Conservative voters,

CHRIS MCANDREW FOR THE TIMES; LISA STONEHOUSE

ith

re

The genius who

bought Apple shares

in his teens

eterandC l C

bb

The working

pensioners who rent

out a second home

How the OTS changes would affect...

A COMPANY DIRECTOR

SELLING SHARES

A basic rate taxpayer

who wanted to sell

£1 million worth of

shares in their company

that they have held for

eight years.

Under existing rules

they would get

something called

business asset

disposal relief

because they have

held the shares for

more than two

years. They would

pay only 10 per

cent tax on the total

gain, minus their

£12,300 allowance, so

get a bill for £98,749.

Under the new rules,

assuming that rates

were aligned with

income tax, the £12,300

allowance was reduced

to £4,000 and the

business relief threshold

raised to ten years

instead of two they

would pay £435,075.

A LANDLORD SELLING

A RENTAL HOME

Someone who bought

a £75,000 property 30

years ago, rented it out,

and now wanted to sell

it for £650,000 would,

after using their £12,300

allowance, face a tax bill

of £155,056 if they were

a basic rate taxpayer.

Under the proposed

new rules they would

pay £245,075.

AN INVESTOR SELLING

STAKES REGULARLY

An investor with

a £35,000 income

who wanted to cash in

investment gains of

£12,300 this year to

take advantage of

the existing CGT

rules would pay

no tax. Under the

proposed new

rules, assuming

a reduction in the

allowance to £4,000,

they would pay 20 per

cent tax as a basic rate

taxpayer and so have

a bill of £1,660.

Source: Blick Rothenberg,

a tax, accountancy and

advice firm

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