Is your fund performing badly? Here’s what you need to do Investors with money in Fundsmith Equity and Scottish Mortgage should take note
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wo of the most popular active funds of recent years, Fundsmith Equity (B41YBW7) and Scottish Mortgage (SMT), have had a terrible 2022 so far. Fundsmith Equity has fallen in value by 18% and Scottish Mortgage is down by 44% in the space of just six months. Fundsmith Equity
Scottish Mortgage
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Chart: Shares magazine • Source: FE Analytics
Investors might normally be spitting feathers at such performance, but these two funds have delivered exceptional returns for investors over many years, and so the managers have considerable credit in the bank. All long periods of underperformance start with a short period of underperformance though, so how do you know when it’s time to ditch your active manager?
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• After 1 year: Put the fund on a watchlist • After 3 years: Serious review whether to keep or sell • After 5 years: You need some very good reasons to keep the fund, otherwise get out
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HOW LONG SHOULD YOU SUFFER UNDERPERFORMANCE?
STEP ONE: BENCHMARK COMPARISON The first thing to do is assess performance properly. Fund price movements up and down are clearly what ultimately matter most to investors, but if you’re evaluating an active manager, you need to set their performance in context, by comparing it to an appropriate benchmark. Both Fundsmith Equity and Scottish Mortgage
are global funds, so it makes sense to compare them to the performance of the global stock market, through a broad index like the MSCI World. If you were assessing a UK fund you would probably use the FTSE All-Share as a comparator, or for a European fund it would be the FTSE World Europe ex-UK index. Most funds will provide a benchmark on their factsheet or in their prospectus if you need a point in the right direction. The MSCI World index has fallen by 10% this year, so by this measure, Fundsmith Equity and Scottish Mortgage still fall short of the mark. But six months is a really short time over which to judge performance. If you’re not prepared to accept six months of underperformance every now and then, you should probably opt for index tracker funds rather than active funds. Looking at the examples of Fundsmith Equity and Scottish Mortgage over a longer period, things start to look better. Over five years Fundsmith Equity has returned 62%, Scottish Mortgage has returned 92%, and the MSCI World index has returned 57% in sterling terms. In these cases, investors have got the outperformance which they come to expect from active funds. 07 July 2022 | SHARES |
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