WARREN INGRAM: Before you ditch your dastardly, dismal unit trust …

People who invest in unit trusts are generally told they should invest for the long term. For most of us, five years qualifies as “long term”.

What do you do if your unit trust has delivered pathetic growth over the past five years? Is it a good idea to sell? If so, how do you decide on a replacement? How will you know that your replacement is going to be any better than the fund you are selling? This is the conundrum many unit trusts and their advisers face.

‘Long-term’ growth has been pathetic

Over the past five years, the average balanced unit trust — that invests in shares, bonds, listed property and cash — has grown by less than 5% a year and hasn’t even kept pace with inflation. Investors are understandably becoming despondent and many are starting to question the wisdom of investing their money in these funds.

Funds that invest in shares (equity funds) have done even worse, with an average growth of 3.5% a year over five years.

Time to make a change?

It is human nature to want to “do something” when we are unhappy or worried about our investments. This instinct is excellent when faced with a threat to your personal safety (for instance, when a lion is chasing you) but it is not very helpful when you need to make rational decisions.

Very often, when our investments are doing badly, we decide to sell them and invest in something that is currently performing well. This is the decision that usually costs you a lot of money. For example, if you had bought the balanced unit trust with the best performance five years ago, you would be an even more unhappy investor than someone who bought the worst performer at the same time.

I looked at the top fund performer in 2014 (over a five-year period) to see how it performed over the five years that followed, that is, until the end of August 2019. You might be surprised to know this fund no longer exists!

Looking at the three next best-performing funds, I found they were distinctly underwhelming. You would have done much better if you had to invest in the worst-three performers in 2014. Interestingly, none of the top or bottom three could beat the average performance of all balanced unit trusts.

Bottom line

It is completely understandable to be irritated with your unit trust if it performed badly over the last five years. It is highly likely that your adviser (if you still have one) has run out of new ways to tell you to remain invested. However, that is probably what you should be doing. My research shows that you are probably going to be really happy with your “bad” performer if you keep faith for another few years. This is especially true if your fund is one of the worst performers at the moment.

How to choose one unit trust over another

If you do need to choose a unit trust, consider this: over time, the funds with the lowest fees are often near the top of the performance rankings. This doesn’t apply over short periods of time but certainly over five years and longer.

I like funds that are managed by established asset managers that have a history of delivering returns in good and bad markets. I also want fund managers that focus on broader issues such as sustainability. For example, are they worried about environmental issues, social and gender inequality, and governance? How do they demonstrate this in their investment selections? My basis for these concerns is performance. Fund managers who think about broader issues such as sustainability and choose to invest in companies that have the same focus are likely to think about the long term more carefully than those who chase short-term profits.

Lastly, I like to combine funds. For example, I like to match half my money in an index-tracking investment with an actively managed fund where the fund manager is aiming to beat the index over the long term.

Sometimes, the secret to success with investments is a bit more patience. This is not rocket science, but it is very hard to be patient when things are going badly. Be slow to change because you might already be invested in tomorrow’s best performer!