Vital questions your clients should ask

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When managed funds underperform it could be due to chasing past returns or selling funds that have underperformed in favour of those that recently outperformed – only to find that was exactly the wrong thing to do.

NAB Private Wealth investment strategist Nick Ryder says that planners should make sure their clients ask four questions before deciding to sell a fund:

  1. Why is the managed fund underperforming?
  2. Is the manager openly communicating the causes of the underperformance and the strategy for reversing it?
  3. What is the magnitude of the underperformance?
  4. Is the manager performing in line with expectations given its style/strategy?

It is important to know whether weaknesses are due to the manager’s style, poor stock selection, disruptions in the business, or a manager moving outside its risk guidelines. “If it was a result of the latter issues then the fund holding should be reviewed,” says Ryder. “If on the other hand, it was a result of external macro issues affecting the specific style, there may be scope to maintain the fund holding.”

Ryder says to take into account historical experience of the fund, and analyse whether the underperformance is in line with the potential outcomes given the flexibility of the strategy. “Reviewing a managed fund against its peer group is a great way of helping to answer the last questions.”

“If there is no clear reason for the underperformance, or the manager is unwilling or unable to explain the reasons then redeeming would be the best option,” says Ryder.

Morningstar’s managed fund performing league tables found that for the first quarter of 2013, value-style fund managers did best on average among the large-cap Australian share funds, although most of their growth counterparts also outperformed the index. Well over half (68 of 102) of large-cap Australian share funds managed to beat the market in the first three months of 2013.

Value-style options also came out on top in the Australian smaller companies category, the 9.43% quarterly average return easily outpacing the S&P/ASX Small Ordinaries Index's 1.61%. The market's result was hampered by the poor performance of small resources companies, which fell over the quarter. Only four of the 46 options in this category were unable to beat the index.