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Keep a watch on your funds By Faith Glasgow
Despite the odd hiccup here and there, the past five years have been very kind to equity investors. According to industry research, if you'd invested £1,000 in the average UK All Companies fund five years ago, it would have grown to £1,565 But what these averages don't tell you is that while some funds have done brilliantly, others have put in a miserable performance - and, unfortunately, far too many of us are invested in the latter. Yet even ongoing bad performance doesn't seem to motivate investors to vote with their feet. Prudential's UK Growth fund has been languishing in the Bestinvest doghouse for several years, yet still holds a whopping £2.4 billion of investors' money. The £780 million Fidelity UK Growth fund has also fallen short of expectations, as has Henderson European, with over £500 million under management. Such funds can have a significant impact on your portfolio. For example, according to Darius McDermott, managing director of Chelsea Financial Services, over the three years to 1 March, top-performing UK All Companies funds on its buy list, such as Saracen Growth and Old Mutual UK Select Mid Cap, have grown by around 105%, while sell fund New Star Select Opportunities has made less than 20% over the same period. Similarly, the best buy European funds have outperformed the sector's worst sell funds by over 90% over three years. So, how can you tell when your holdings are underperforming, and if they are, whether it's time to take action? You need to compare a fund's performance with that of its sector benchmark. Modray suggests looking for the fund factsheet. Visit a financial website offering data on unit trusts, such as Interactive Investor. But don't look at performance over just three or five years; you'll get a better idea of how your fund shapes up over time if you compare its performance against the benchmark for several separate years in a row. The last laugh It's quite possible for excellent managers to go through a contrary patch if the manager's style is out of fashion. In the late 1990s, technology companies promising stellar growth were all the rage, and 'value' investing was considered deeply unimaginative. But a handful of managers - most famously Neil Woodford of Invesco Perpetual - stuck to their guns, insisting the tech-boom was just a fad. Woodford's fund performance was mediocre compared with that of his rivals, but he had the last laugh when the bubble burst. So it's important to take a close look at the manager's longer-term track record. There are other considerations, too. If your fund performance is pretty close to the benchmark - a bit better one year, a bit worse the next - it's probably a closet tracker. If you're getting tracker performance from a so-called active manager, why not just switch to a tracker and pay lower charges? Don't assume that a change of manager is bound to make everything better. Switching to a more successful fund run by a proven manager is usually a more sensible plan. Keep checking All this means that it's vital for investors to regularly review their portfolio. There's no hard-and-fast rule as to how often you need to do this, but a check every six to 12 months is sensible. Partly, you should be checking that you still have a good balance between assets and sectors. But there's also the danger of being too attentive. Remember, funds are designed as relatively long-term investments. However, keep in touch with what's going on more generally in the fund management arena by reading the national papers and specialist money magazines. Once you've decided to switch funds, you have to find a suitable alternative. One option is to look at the shortlists of recommended funds supplied by brokers. The process of moving your money isn't difficult, but using a fund supermarket makes it that much cheaper and quicker. Five funds and alternatives Prudential UK Growth
45% growth over three years, underperforming the benchmark by 10%. Yet despite the fact that it has underperformed in eight of the last 10 years, it still manages £2.3 billion. Switch to Rensburg UK Select Growth, up by 90% over three years, outperforming the benchmark by 18%. Manager Mark Hall invests across large, medium and small companies, deviating significantly from the index. Resolution European Growth
46% growth over three years, underperforming the benchmark by 14%. A new manager has been poached from Gartmore. Switch to Artemis European Growth, up by 84% in three years, with 16% outperformance. The fund manager uses a complex self-developed computer analysis system called SmartGARP to identify companies that look attractively priced relative to future potential returns. Invesco Perpetual US Smaller Companies
Over three years it has lost 2%, underperforming the benchmark by 27%. Manager Ian Brady boasts a pretty miserable track record, both at Invesco and during a spell at Schroders. Switch to Schroder US Smaller Companies, up 36% over three years to 1 February. Manager Jenny Jones seeks under-researched growth companies at a reasonable price. M&G Japan
Up 26% over three years, underperforming the benchmark by 10%. It's not the worst Japan dog, but M&G has rubbed salt into the wound since hiking the annual charge from 1% to 1.5% in September 2006. Switch to Fidelity Japan - 2006 was an abysmal year for Japanese fund managers. Although Fidelity's fund is more cautious than some, it still suffered. Nonetheless, the fund is worth holding in the longer term, as it is run by a strong management team. Lloyd George Emerging Markets
89% return over three years, underperforming the benchmark by 12%. With £325 million under management, this high-profile manager is under pressure to improve. Switch to First State Global Emerging Markets. In recent years, the manager Angus Tulloch has paid the price for taking a cautious approach - for example, he shunned the energy sector which has performed very well over the last four years.
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