By
definition, every portfolio will have one investment that is lagging in performance at any given time.
However, moving from an investment with poor relative short-term performance to an investment with superior
short-term performance could yield disastrous results. This “chasing past performance” approach frequently
produces below-average outcomes.
Consequently, there are a set of criteria to follow prior to making a sell decision.
Sell
Criteria:
Changes in personal situation
Changes to one’s personal circumstances will require a review of current portfolio holdings to
ensure they still match current objectives. As one approaches retirement, for example, portfolio volatility
should be reduced. This means selling some of the more aggressive investments and investing in more
conservative ones.
Rebalancing your portfolio
A properly diversified portfolio will require rebalancing from time to time. For example, if one’s
personal objectives and risk tolerance suggest an optimal asset allocation of 60% in equity-based investments
(common stock, equity funds, et cetera) and 40% in fixed income investments (bonds, GICs, et cetera), some
investments will need to be sold periodically to maintain this allocation.
Changes to an underlying investment
If an investment fund changes managers, the fund should be re-analyzed to ensure that the new
manager’s style still meets the stated objectives. If this is not the case, the fund should be sold.
The situation becomes more complex when “style drift” is involved. When purchasing an investment fund because
of a manager’s particular style, there is the expectation that the style will be adhered to. In today’s
marketplace, however, there is great pressure on managers to perform well in any given market; this in turn
drives some fund managers to alter their style to match the best-performing strategy in the short
term.
While this may sound like an effective approach, the reality is that “style drift” tends to produce poor
performance over time. When a fund manager changes the investment style mid-cycle, the fund would have missed
most of the upside while participating in all of the downside. In addition, when the original style
comes back into favour, the fund would miss out on that growth as well.
Peer group analysis
When comparing investments, it is crucial to compare funds within the same category, i.e. they share
the same or similar objectives. Comparing the performance of a Canadian equity fund to the performance of a
foreign equity fund would be like comparing an apple to an orange.
In addition to comparing the same types of investments to each other, it is equally important to match
investments with the same investment styles — Canadian equity growth versus Canadian equity growth or
Canadian equity value versus Canadian equity value, for example. To properly assess an investment’s
performance, the appropriate comparisons must be used; otherwise the analysis becomes irrelevant. •
Clay Gillespie is a financial advisor and portfolio manager with Rogers Group Financial. The views
expressed are those of the author and not necessarily those of Rogers Group Financial, which makes no
representations as to their completeness or accuracy.
photo courtesy
of www.sxc.hu / svilen001
