Picture: 123RF/Vadim Guzhva
Picture: 123RF/Vadim Guzhva

When returns are low, the temptation to switch between unit trust funds is much stronger. But these switches often lead to poorer, rather than improved, performance, data from one of the larger unit trust fund platforms shows.

If your fund is delivering a return of 3% a year or less, you are 2.5 times more likely to switch to another fund than if your funds is earning 15% a year or more, according to research done by Momentum Investments.

But often it’s the worst thing to do. Paul Nixon, the head of technical marketing and behavioural finance at Momentum Investments, says between 2008 and 2018, the actual returns earned by investors on its platform who switched funds were lower than those they would have earned had they remained with their first fund choices.

Investment platforms offer you easy access to a range of funds from different managers and facilitate easy switching between these funds through a single administrator.

But easy switching seems to have destroyed value for many investors. Momentum found that one in two of 17,600 investors who used its platform in the decade to 2018 switched funds during periods of poor performance but would have earned 1.1% a year more — or 11% over 10 years — if they had stuck with the funds they initially picked.

In flat or rising markets, only one in four investors switched, and would have earned an additional 1% a year, or 10% more over 10 years, if they had stuck with their original choice.

Jeanette Marais, CEO of Momentum Investments, told the recent Collaborative Exchange Investment Forums held in Johannesburg and Cape Town that the JSE all share index returns were positive and inflation-beating over all four-year periods between 2003 and 2016.  

Yet 71% of investors on the Momentum platform over the decade to the end of 2018 did not beat inflation and 9% of these earned negative returns. Just 12% of the advisers advising investors using the platform had managed to get at least inflation for more than 75% of their investors, she says.

Marais says this proves that investors are often not rewarded for attempting to pick what they believe will be well-performing funds.

Mthobisi Mthimkhulu, a team leader for private clients at Allan Gray, says that while you may, after a few years of flat returns and a particularly difficult 2018, be tempted to switch out of a fund that is doing poorly and buy into another fund that is doing relatively better, this inevitably destroys value.

If you sell units in an underperforming investment, you will lock in the underperformance. At the same time, the fund that you switch to may not be positioned to repeat its good performance of the past. In effect, by switching you are often selling and buying at exactly the wrong time, he says.

Switching could also cost you in initial fees and capital gains tax, he says.

To help prevent you being tempted to compare funds and switch at the wrong time, some investment houses like Momentum are offering “outcomes-based” investments. They set an investment time horizon and a return target and then create the portfolio most likely to achieve that goal without exposing you to an investment experience that could spook you into disinvesting.

For example, Momentum’s Focus 7 investment targets a return equal to the inflation rate as measured by changes in the consumer price index (CPI) plus 6% net of fees if you remain invested for seven years. This investment should then be measured against this return over rolling seven-year periods.

Marais says Momentum is already doing this for retirement funds where its CPI + 6% portfolio has had an 84% success rate in achieving CPI + 6% over rolling seven-year periods since 2008. 

Many absolute return funds target inflation-linked returns, but Marais says the outcomes-based funds differ from these funds in that they make greater use of diversification across asset classes and tend to have more stable exposures over the medium to long term, in line with their strategic asset allocation benchmarks.

Absolute return portfolios make greater use of dynamic hedging, derivatives, options and variable asset allocation and have higher costs as a result, she says.

Brandon Zietsman, CEO of Portfoliometrix, says the issue for many investors is less about switching funds and more about changing investment strategies — typically taking on more risk when returns have been good and derisking when they have been poor. 

The issues often get conflated because fund switches often coincide with strategy switches — when, for example, you move from a balanced fund to an income fund. This is proven to be a destroyer of value and, when in doubt, rather sit on your hands, he says.

You do not have to blindly stick with a poorly managed fund, but what constitutes a “bad” fund is not obvious, he says. It certainly does not relate to performance only and a great deal of insight and experience is required to draw such a conclusion, Zietsman says. What investors do need to do is stick to their strategy and avoid fiddling with their portfolios based on recent, often noisy, history and predictions of the future that are even noisier. 

Your asset managers should make risk-based asset class tilts when required, but should also not get seduced into playing the market timing game, he says.

Mthimkhulu says you should only switch managers who perpetually underperform over longer periods of five to 10 years, or who change their investment philosophy.

Nedgroup Investments senior investment analyst Anil Jugmohan says it considers performance in relation to the manager’s track record and investment philosophy, checking whether a manager deviated from its stated investment philosophy and process. It also checks if key individuals have resigned, or if the culture of the business has changed.