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

Posted by: Ben Debney
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Scary HalloweenInspired by Halloween, here we look at the scariest funds of 2021 and how you can avoid getting stuck in funds like these in the future. There have been plenty of frightening times for investors in recent years, but panic will only set in if you are investing without a clear rationale, a clear plan.
 
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 bang on about building your investing plan. A well-constructed plan means that 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 not just 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 of 2021, the worst performers since the start of the year, are shown below.
 
With the FTSE World Index being up 15.4% so far in 2021, these funds really are terrible, as you will see. But have they fallen so far that there is an opportunity?
 
Woodford Equity Income, renamed as LF Equity Income and suspended since June 2019, is the worst performing fund down 33.5% year to date. Our analysis right from the fund’s launch was clear that there wasn’t a good reason to hold this fund, as we said here.
 
There are five funds focused on Latin America, a region which, like several emerging markets, has struggled to manage the COVID-19 crisis, and then sharp falls in some commodity prices – this sector is very tied to the momentum in commodity prices. The worst fund, from HSBC, is down nearly 30%. There might be an opportunity, as another way to play an upward swing in the commodity cycle – we need to explore this a bit more before being too dogmatic.
 
Making up the remainder of the scary funds are a duo of China funds, a property fund and a precious metals fund.
 
For those who wish to have a foothold in China, there are more interesting funds than the two in this table. An opportunity will undoubtedly arise for this gold fund – they always do – but it is not obvious that this is the time.
 
Table 1 – Worst Funds in 2021*
Name
Sector
Performance %
LF Equity Income
IA Unclassified
-33.5
HSBC GIF Brazil Equity
IA Specialist
-29.1
Brown Advisory Latin American
IA Latin America
-25.7
Aviva Inv European Property
IA Unclassified
-23.9
JPM Brazil Equity
IA Specialist
-23.1
Invesco PRC Equity
IA China/Greater China
-16.1
BlackRock GF Latin American
IA Latin America
-15.7
JGF-Jupiter Gold And Silver
IA Specialist
-15.7
Threadneedle Latin America
IA Latin America
-14.9
HSBC GIF Chinese Equity
IA China/Greater China
-14.9
*Funds greater than £50m in size, performance from 01/01/2021 to 22/10/2021.
 
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 Jupiter Gold and Silver fund is over 7x more volatile than the average for its Specialist sector.
 
Table 2 – Worst Funds, Risk
Name
Sector
Worst Month %
Sector Worst Month %
HSBC GIF Chinese Equity
IA China/Greater China
-13.2
-11.2
Invesco PRC Equity
IA China/Greater China
-14.9
-11.2
BlackRock GF Latin American
IA Latin America
-7.9
-8.2
Brown Advisory Latin American
IA Latin America
-11.8
-8.2
Threadneedle Latin America
IA Latin America
-8.9
-8.2
HSBC GIF Brazil Equity
IA Specialist
-12.6
-1.6
JGF-Jupiter Gold And Silver
IA Specialist
-12.5
-1.6
JPM Brazil Equity
IA Specialist
-10.9
-1.6
Aviva Inv European Property
IA Unclassified
-22.7
-1.3
LF Equity Income
IA Unclassified
-24.4
-1.3
 
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.
 
Once you’ve sold, we recommend buying back in 30 days later, provided you are more than a month away from your next review.
 
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 when you’ll buy, when you’ll sell and how you will get back in once you’ve sold.
Topic: Fund analysis


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