As we are almost heading towards the end of fourth quarter in 2018, it is usually the period where investors would reassess the performance of their portfolio. One of the simple and common practices when one rebalances his portfolio is to remove the underperformer and replace it with a top-performing fund. In this article, we will discuss, under certain condition or market environment, why it is fine to keep the underperforming fund in your portfolio.
Understand The Role Of Each Fund In Your Portfolio
Performance is not the only criteria that one should consider when they assess their investment portfolio. One should understand that different unit trust fund plays different role in their portfolio hence, not all funds are meant to be the performance driver.
As what we have been mentioning in the past, the theory of managing a portfolio is synonymous with the “Football Team” analogy. As such, from a soccer manager perspective, he will not remove the defender out from the squad simply because the player could not score any goal.
Similarly, some defensive funds (bond fund or balanced fund) which are generally lower risk in nature are meant to guard your nest egg – capital preservation. Therefore, they usually underperform the equity fund during a good market environment.
Apple To Apple Comparison
Apple to Apple comparison does not mean that it is appropriate to put two equity funds together and compare their performance. Once should note that funds with different geographical allocation and investment strategy would make a big difference in the performance figure.
For example, in 2018, an equity fund with US exposure would have outperformed the China equity fund. Hence it might not be appropriate to compare the performance of two equity funds with different geographical exposure.
Apart from the geographical allocation, the investment strategy adopts by the fund manager also make a huge difference. For example, among the two FSM recommended fund for Malaysia equity category,
Kenanga Growth Fund (growth-oriented fund) has outperformed the
Eastspring Investments Equity Income Fund (income-oriented fund) in a bull market in 2017. However, in 2018, with the increased volatility in the local equity market due to both the internal and external factors, Eastspring Investments Equity Income Fund with a rather defensive investment strategy has outperformed Kenanga Growth Fund so far on YTD basis.
Understand The Reason Of Underperformance
Some underperformance might be due to the tactical defensive strategy adopts by the fund manager during a volatile market environment where the fund manager raises the cash level to shy away from the market uncertainties instead of staying close to fully invested in the market. As such, if the market rebounds, the particular defensive fund manager might miss out the rally by holding higher amount of cash and underperform the peers.
In such a case, in order to have a better view on the fund manager capability in managing the fund and deliver consistent returns, it would be more appropriate for investors to assess the performance of the fund over a longer period (3 to 5-year) and to evaluate both the calendar year return and cumulative return.
All in all, although fund performance is an important factor to consider for selecting a fund into one portfolio, it shouldn’t be the only factor that investors take into considerations (especially the short-term performance). We believe that investors should have a good understanding on the fund’s features, fund manager investment strategy and focus on the longer-term performance of the fund for both the calendar year as well as the cumulative returns.
Given the volatile market environment, we continue to advocate our investors to adopt a portfolio approach in order to ride through the market volatility along their investment journey. For investors who wish to leverage on our expertise as they have little or no time to carry out their own analysis on the available mutual funds or to construct and manage their own portfolio, they can consider the one-stop portfolio solution –
FSM Managed Portfolio.