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The truth about underperforming managers

You may be tempted to withdraw money from a unit trust fund when it underperforms. Every manager who is successful over the long term has at least one year of underperformance every few years. Research has shown that last year’s top quartile fund manager is seldom this year’s top quartile manager. Continuously switching into last year’s top funds is very likely to provide you with an underperforming fund experience over your total investment term. Also resist withdrawing money before the minimum recommended investment term has expired, as the fund manager might not have had enough time to realise the target return of the fund.

The truth about market crashes

Equity and multi asset funds are long-term choices and they will experience short-term capital losses. The best time to buy into an equity fund, for example, is just after a market crash, when the underlying assets are undervalued. Buying low and selling high creates an opportunity to take profit. In contrast, withdrawing money after a market crash means that you are selling low and locking in your losses.

Consider the tax consequences of your decision to withdraw

When you switch or withdraw from a fund, you are selling your units. This is a taxable transaction and you will need to declare the capital gain in your annual tax return.

Managing expectations

The most effective way to avoid panicky withdrawals is to check your expectations when you invest.

  • Make sure you ask your financial planner about the size of the drawdowns (a drop from the highest unit price to the subsequent lowest price before the fund starts its journey back to the peak) that you can expect.
  • Have a look at how long it took your fund in the past to recover from a drawdown. Bear in mind that future drawdowns could be even larger than those in the fund’s past, and may take longer to recover.
  • Every fund manager will underperform its peers at certain cycles in the market or when certain investment styles dominate. Establish when you can expect your fund manager to underperform.

Consult your financial planner

Sometimes a fund loses its fund manager or other key staff. Or the investment house may change its investment philosophy and process. Any of these changes could jeopardise the continuity of a good performance record. A good financial planner should be well-informed in terms of any fundamental changes and will help you decide whether there are sound reasons to withdraw.

There are good reasons to withdraw

When you invested, you most probably had a goal which you were saving for. This could have been accumulating a deposit on a new house, the education of your children or supplementing your retirement savings. When you have reached your goal amount, it makes sense to reward yourself for your investment discipline. Apply the money as planned. Using the money to settle a high-interest loan is another good reason to disinvest. However, if the time has arrived for your children to start their tertiary education or if you are nearing retirement age, think carefully before you withdraw money from your unit trust investment shortly after a market crash. You will be locking in all the value that the fund has lost since the previous market value high. If possible at all, use money sources that are not dependent on the ups and downs of the market, such as family loans and cash reserves, until your unit trust fund recovers.

Sanlam Life Insurance is a licensed financial service provider.
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