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Scary funds? Only If You Don’t Have A Plan

Posted by: Brian Dennehy
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There have been plenty of frightening times for investors in recent years, no more so than 2020.  But panic will only sets in if you are investing without a clear rationale, a clear plan. Here we look at the scariest funds of 2020 and how you can avoid getting stuck in funds like these in the future.

What humans find scary is the unknown. So, it is unfortunate that investing is all to do with the unknown! No one knows which way the markets will go with a useful degree of both certainty and consistency. Anyone who says they do is setting themselves up for a fall.

That’s why we go on-and-on about building your investing plan. If you have determined why you will buy and why you will sell then you are reducing what you don’t know. You shouldn’t be surprised by the markets, or end up stuck in poor performing funds. 

Your investing plan should identify how you select funds. The process you use must:

  • make it straightforward to identify top-rated funds.
  • be objective, clear and understandable.
  • be easily repeatable.
  • be supported by a volume of long-term evidence of it generating extra growth.

Your plan must include detail not just on when you’ll buy, but when you will sell (and how you will get back in once you have sold). This is not something which most people find comfortable – whether the selling or the buying back – but with practice you will be fine. And you will sidestep deep and prolonged market falls and “scary funds”.

The Scary Funds

The scariest funds for 2020, the worst performers since the start of the year, are shown below:

Table 1: Worst Funds In 2020*

     

Fund Name

Sector

Fund Size (m)

Perf. %

LF Equity Income

IA Unclassified

285.4

-63.52

Schroder ISF Global Energy

IA Global

248.6

-50.02

Guinness Global Energy

IA Global

87.3

-49.53

BlackRock GF World Energy

IA Specialist

1601.5

-41.63

HSBC GIF Brazil Equity

IA Specialist

199.1

-40.95

GVQ UK Focus

IA UK All Companies

138.8

-38.9

Brown Advisory Latin American

IA Specialist

79.7

-37.79

GVQ Opportunities

IA UK All Companies

55.4

-37.06

Quilter Investors Equity 2

IA Unclassified

164.7

-35.66

UBS UK Equity Income

IA UK Equity Income

78.2

-35.19

* more than £50m

Woodford Equity Income, now renamed as LF Equity Income, is the worst performing fund down 63.5% year to date. Since being suspended in June 2019, this fund has suffered huge losses, and is now valued at £285m. It’s been a scary ride for investors, yet on our analysis right from the launch, and every year thereafter, there wasn’t ever a good reason to hold this fund, as we said here.

Three Energy funds (two Global, one Specialist) also make the bottom ten, following a dramatic decline in the price of oil in March. One of these is Blackrock GF World Energy, which is down 41.6% and accounts for a massive £1.6 billion. Diminishing oil prices can be explained by fears of a global downturn due to coronavirus and the subsequent price war between Russia and Saudi Arabia.

Disruptions to Energy have had a knock-on effect on some UK Equity Income funds that have a significant exposure to this sector. This includes UBS UK Equity Income, which has 15% in the Energy sector.

Also taking a tumble are two Specialist funds focused on Latin America, HSBC GIF Brazil Equity and Brown Advisory Latin American. A slow response to the coronavirus outbreak is a key reason for this poor performance.

Finally, along with Quilter Investors Equity 2, there are two funds from the UK All Companies sector. These are ‘Value’ style funds which, as discussed in a recent blog here, have really struggled in recent months.

What about risk?

If woeful performance isn’t enough, Table 2 shows how risky these funds have been since the start of the year. As an indicator of risk, I compare a scary fund’s Worst Month to the average of its sector, again since the start of the year.

For example, the Schroder fund is 4x more volatile than its sector.

Table 2: Worst Funds, Risk

     

Fund Name

Sector

Worst Month %

Sector Average %

Schroder ISF Global Energy

IA Global

-44.61

-10.19

Guinness Global Energy

IA Global

-29.10

-10.19

BlackRock GF World Energy

IA Specialist

-23.40

-14.32

HSBC GIF Brazil Equity

IA Specialist

-35.01

-14.32

Brown Advisory Latin American

IA Specialist

-34.44

-14.32

GVQ UK Focus

IA UK All Companies

-25.48

-18.53

GVQ Opportunities

IA UK All Companies

-24.39

-18.53

UBS UK Equity Income

IA UK Equity Income

-21.9

-18.44

LF Equity Income

IA Unclassified

-37.21

-9.68

Quilter Investors Equity 2

IA Unclassified

-28.32

-9.68

What’s your exit plan?

You would understandably be in a real panic had you held one of these funds and had no exit strategy. This emphasises the importance of a stop-loss, which limits your losses and guides you through times of possible distress.

There’s no perfect strategy but we recommend setting an 8% “early warning” to give you time to mentally prepare to sell, and then a 10% stop-loss alert to do the deed. There’s more on stop-losses and how to use our stop-loss tool here.

You need a process to follow

It is obvious that making it up as you go along is simply not good enough, but for getting lucky occasionally. 

With no plan the results can be devastating, and you could easily be stuck in one of these scary funds.

Ensure that your investment process specifies why you’ll buy and when you’ll sell.

Topic: Fund analysis


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