Think before you sell

These are a useful part of the wide and comprehensive research that you must undertake if you manage your own portfolio. Rationalising holdings can be as important as adding holdings: we frequently get examples in our Portfolio Clinic of investors who have continued to add but not remove holdings, meaning that any holding which performs well accounts for such a small proportion it does not add much to the overall portfolio return. Ejecting poor performers is one of the ways you can go about reducing holdings.

But just as lists of favoured funds are not prompt to all investors to go and buy everything on them, these lists of poorly performing funds are not an injunction to sell anything in your portfolio that appears on them.

Bestinvest says if a fund appears on its Spot the Dog list it requires further investigation. It also explains that there are many reasons why funds go through periods of poor performance, and deciding whether to hold or switch a fund is all about assessing its future prospects, and whether you might be able to do better elsewhere.

"It is important to stress that Spot the Dog is not a list of funds that should be sold automatically, as it is based purely on factual analysis of past performance which is not necessarily a guide to how a fund will perform in the future," the broker explains. "Indeed, there may be good reasons to believe the future prospects are better."

Bestinvest says there are many different ways of investing and some funds have distinctive styles or investment approaches that can go through periods that are deeply out of step with current markets, but could be about to come back into favour, for example, value or growth.

Each fund in the Chelsea RedZone has underperformed its sector average for three consecutive discrete years, and has not had a manager change or process change within the past 18 months. "It is broadly fair to say that you might expect a fund to outperform in at least one of every three years," says Darius McDermott, managing director at Chelsea Financial Services. "Three out of three years of poor performance should ring some alarm bells."

But even the best managers will have a bad year or two, and some managers are better suited to tougher times, and others to rising markets. You should also not judge or invest in a fund over a short term time horizon: risk assets such as equity funds should be held for at least five years.

So it is important to compare a fund to a relevant benchmark. For example, a value-orientated fund may not be doing well against growth funds, so underperform its fund sector average and a growth-orientated index that many funds in this area are compared to - for example, the S&P 500 in the US. But how is it doing against a relevant value index such as the Russell 3000 Value or MSCI USA Value?

And even if an area such as value is not doing well now, this might change, so you need to consider if it's worth waiting for whenever this will happen.

If a fund which has performed poorly over the last few years has recently appointed a new manager or changed investment strategy, it could also be worth waiting to see if performance improves. "An example of a fund in the current edition of Spot the Dog that investors might persevere with is St James's Place Far East (GB0007667669), as the management contract has just been handed to Martin Lau at First State, who has an excellent track record," says Jason Hollands, managing director at Tilney Bestinvest.

The other Asia Pacific 'Dog' in Bestinvest's latest report is Aberdeen Asia Pacific Equity (GB00B0XWNG99) which is in this list for the third time, though year to date it has beaten MSCI AC Asia Pacific ex Japan Index. "This hound is managed by an experienced team which, despite a strong track record, has struggled in recent years," says Bestinvest. "Year to date the fund has had a stellar time and has managed to outperform its benchmark. Unfortunately, it can't escape its past performance and over a three-year timeframe is still lagging by 12 per cent."

The area a fund invests in can be a factor. For example, mining shares and commodities have had a difficult few years, so funds in this area are likely to have returned poor numbers. But if you had sold one of these at the end of last year you could have lost out as this year mining shares have been doing better. "You need to consider where we are in the market cycle," says Mr McDermott.

Meanwhile, selling a fund can incur charges unless you hold it on a platform that enables free fund switches. And if you hold your fund outside a tax wrapper such as an individual savings account (Isa) or pension, you need to consider if its sale will incur capital gains tax (CGT).

Everyone has an annual CGT allowance of £11,100. If your gain exceeds £11,100 you could sell the fund off in chunks over a few years to stick within your allowance. Or transfer part of the holding to your spouse or civil partner who could also make use of their CGT allowance.

And you do not incur CGT when selling something at a loss. However, if you have held a fund for a long time, even it if has been performing badly more recently, you might still be sitting on a gain since the time you bought it.

Broker lists of poorly performing funds do not cover everything, so just because a fund doesn't appear in there doesn't mean it continues to deserve a place in your portfolio. For example, Spot the Dog, doesn't include fund of funds and multi-manager funds because of the absence of like-for-like benchmarks, but again there is no point holding these if they have been losing you money over long periods and have high charges.

None of the lists mentioned include investment trusts but you need to monitor performance and suitability of these too.

So don't suffer Dogs gladly, but think, research and evaluate before you sell.