Disappointed with the mutual funds you hold? It's not an uncommon sentiment in an era of low (or negative) returns, continued market volatility and enticing low-fee investment alternatives.
But should you fire your mutual fund? And precisely why, when and how to do it? In coming up with the answers, reflect on your reasons for investing in the fund in the first place, consider what's happening with it now and tailor your expectations and moves to your investment goals and strategies.
"Do I hold or do I fold?" asks Serge Pépin, the head of investments for BMO Investments Inc., adding that the question and the exercise is as pertinent for individual investors as for someone like him overseeing a series of funds and managers. "At some point in time you may need to pull the plug."
Working with a financial planner or adviser, it's important to take time to understand everything from why you were attracted to the fund to where its performance is today, Mr. Pépin says.
"There's so many factors that can make a fund work well in a certain environment – or not," he says, and that principle applies to a wide variety of different funds you may hold. "There's a lot of homework to do."
Sadiq Adatia, chief investment officer for Sun Life Global Investments, says the psychology of sticking with a mutual fund means broadly looking at its performance over the long term.
"In an environment where everything is down, you can't expect your mutual fund to go up," he says. "You have to have the full context behind it."
If things seem to be truly going south, see whether there may have been a change in the fund manager, the composition of the management team or the organization and resources behind it. Good companies have succession plans and backup when managers come and go.
"You have to make sure that you're comfortable with the change that's happening," Mr. Adatia says.
A downturn or modest gain can mirror the general economy or reflect a prudent, less risk-prone manager. "You have to understand both sides of the equation," Mr. Pépin notes, adding that a good portfolio will also include different types of holdings that won't typically go up all at once.
People are often drawn to a fund or a manager with impressive gains, but that may be an example of an "outlier" and of course is in the past, Mr. Adatia adds. "You have to make sure the performance is going to be somewhat repeatable going forward."
Transparency and communications from the company are important; does it provide good customer service, answering questions directly, without marketing jargon?
"If you don't feel confident in the answers you're getting, maybe it's time to fold," Mr. Pépin says.
Read the prospectus and open your statements to make sure you understand how your portfolio is performing and if there are changes in fees or administrative issues. Check your account online and check the fund's performance against the index and its peer group on one of the many research databases and services, such as Morningstar Canada and Globefund.com.
Mr. Pépin says another benchmark is the "me index." Whether a fund is doing well or not, it's important to assess whether it still meets your needs, aspirations and portfolio, especially if you've had a change in your life stage or status. For example, if you're nearing retirement or recently lost your job, you'll have lower risk tolerance.
Fees are another consideration. Canadians pay the highest mutual fund fees in the world, with an average management expense ratio (MER) of about 2.5 per cent. "It's a product, and there's a cost attached to it," Mr. Pépin says.
Mr. Adatia says that professional managers can navigate the ups and downs of the market based on sound investment principles and strategic thinking, although many investors incorrectly feel that having paid a fee to someone to manage their affairs, "I don't need to do it any more."
If you're concerned that a fund is tanking, make sure you aren't being hasty. "Give the thesis time to play out," Mr. Adatia explains.
"You've got to have patience," Mr. Pépin agrees, suggesting that investors stick with a fund for a minimum of three years to truly get a sense of its track record, although adding that surveys show the typical holding period is about half that. "You don't want to overreact to bad performance."
The impulse to buy and sell prompted by huge stock market swings leaves most investors short of their potential. An ongoing study by Dalbar Inc., the Boston investment-research firm, suggests that investors don't hold mutual funds long enough, and tend to buy high during rallies and sell low during dips.
If you've done all your homework and decide to bail, first consider your alternatives, many of which might have lower fees attached but other drawbacks. Going it alone in the market or through a discount broker can still be costly, because of the tendency to act emotionally. There are also other options such as exchange-traded funds that mirror the index.
"But just because there are no or low fees, it doesn't necessarily mean it's a better product," Mr. Adatia says.
It's helpful to make a gradual shift rather than pulling the plug all at once, he adds, similar to dollar cost averaging to avoid market highs and lows. If you've suffered a loss, you may be eligible for a tax write-off if the funds are not held in a registered plan.
Mr. Pépin notes that if the mutual fund is back-end loaded, when you get out you may incur a deferred sales charge, which is levied to encourage investors to stay in for a longer term. This fee starts at 5 or 6 per cent and incrementally falls each year you own the fund, as set out in the prospectus, eventually dropping to zero after five or six years.
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