‘I was hoping for better returns – which funds should I sell?’

When you need to take a lump sum out of your investments, you inevitably have to make some tough decisions on what to sell. But this should also be an opportunity to rethink your strategy and give your portfolio a good makeover.

That's exactly what 29-year-old Genevieve wants to do. She is looking to pay off her student loan, which, as we have discussed in the past, is not always the best course of action for everybody, particularly if they're never going to fully pay back what they borrowed via the instalment system. But Genevieve only has £8,213 left, and with an interest rate of 7.3 per cent, she’s keen to be free of it.

She is planning to liquidate some of her £58,000 portfolio, which is mostly held in an individual savings account (Isa) with some in a Lifetime Isa (Lisa) and a general investment account. She also wants to consolidate the portfolio and boost its performance.

“I started investing in 2017 after getting my first job. Unfortunately, one of my early larger investments was in the Neil Woodford fund, which plummeted soon after. This was a good lesson in spreading risk and active versus passive funds, but it put me off for a little while,” she says. “My other investments haven't performed so well either. Even excluding the Woodford loss, I'm only up about 1.3 per cent a year on average – I was hoping for more.”

To finish paying off her student loan, she is planning to sell BlackRock European Dynamic (GB00BCZRNN30), which “has always underperformed”; Fidelity Asia (GB00B6Y7NF43), which “feels like an old friend that went sour”; as well as Barings Europe Select (GB00B7NB1W76), FSSA Asia Focus (GB00BWNGXJ86), Jupiter Corporate Bond (GB00B743QK57), Artemis Strategic Bond (GB00BJT0KV40) and Baillie Gifford Long Term Global Growth Investment Fund (GB00BD5Z0Z54). She has picked these funds because of the higher fees, together with “a little bit of personal beef”.

Instead, she is planning to regularly invest in low-cost index funds, such as those managed by Vanguard and Legal & General. She adds about £400-£500 a month to her savings, and her main goal at the moment is saving for retirement, so she is “happy to accept a higher level of risk” given her long time horizon. She also has an eye on closer goals such as school fees for future children or potentially a house extension, but they are all at least seven to 10 years away, she says.

“In the past, I've chosen investments by reading around and looking at different funds,” she says. “I've tried to diversify geographically, which was going very well with Fidelity Asia in particular until I seemingly decided to double down at the peak. I've been wanting to consolidate my portfolio for a while but wasn't sure where to start.”

Genevieve’s annual salary is £68,200. She owns her flat together with her husband and also saves £461 a month into her workplace pension.

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES

Preeti Rathi, senior investment director at Investec Wealth & Investment, says:

Alarm bells are ringing, I’m afraid. The funds highlighted for sale seem to be up for the chop due to personal and emotional reasons rather than investment fundamentals. For example, I would dissuade you from selling an investment based on, as you describe it “personal beef”, underperforming what you had “hoped” and becoming an “old friend that went sour”. I would urge you to look under the bonnet and, as a starting point, look at a fund’s track record in performance, where they rank in terms of risk-adjusted returns, volatility and valuation metrics. 

BlackRock European Dynamic and Fidelity Asia, for example, I would retain. Both funds have well-resourced and experienced teams. Although the BlackRock European fund had a difficult 2022, its longer-term record is comfortably ahead of the market and its peer group, which speaks volumes about its management.

Similarly, Fidelity Asia’s managers are experienced and have a good long-term performance track record. They have been adjusting the fund’s portfolio to the dramatic change in the Chinese regulatory landscape and looking at how this impacts businesses. I would be confident that the team can pick decent companies and get it right going forward. They also have a well-developed ESG approach, which is important to a lot of investors in the Asia Pacific region.

It’s great that you have a plan to invest for your retirement and so your focus on stocks is right. But your portfolio is quite stock-heavy already, with a small amount in bonds and 14 per cent in cash. You should consider some “alternative” investments with your sales, such as commercial property, gold or absolute return funds, to diversify and smooth out your returns when stock markets come under pressure.

You mention the benefits of geographic diversification. It’s nice to see your broad spread of geographies and this will serve you well in the long run. You focus on funds when thinking about future investments, which I would agree with.

You already have around a third of your portfolio in index tracker funds. I would only use trackers in markets where it may be difficult to get exposure or outperform, such as UK government gilts or gold. For stocks, I would always take active exposures as passive investing doesn’t allow you to filter out bad investments, which is risky in my view. If you’re still looking for a passive approach, trackers are designed to be cheap, so my only advice is to pick the cheapest option. Vanguard has a broad suite of low-cost trackers and would be a good place to start.

Finally, think about selling your individual stocks because the size of your portfolio does not allow for sufficient diversification. Arguably they are cheaper than funds, but focusing on single stocks leaves you with significant risk. 

Darius McDermott, managing director at Chelsea Financial Services, says:

First of all, don’t be too hard on yourself. You have started your investment journey at a good age, which leaves you plenty of time to make good. You appear to have been a bit unlucky with your entry points, but this performance will smooth out over time as long as you continue to make regular contributions.

Consolidating your portfolio can be challenging, but it’s generally better to have more holdings than fewer. The biggest mistake investors make is having everything in one fund, which you experienced first-hand through your holding in Woodford Income. However, having too many holdings can also be problematic.

I’d recommend starting by examining any small positions. If you like them, consider increasing their weight; otherwise, dispose of them. For example, the holdings in your general investment account: Legal & General (LGEN), Aviva (AV.), Rolls-Royce (RR.) and Tesco (TSCO), account for a very small part of the overall portfolio, but it takes time to keep on top of them. It might be worth rethinking this. Then review your funds and make sure that managers have not recently left or retired, and that your portfolio has a good mix of investment styles and is not overly invested in one part of the world or asset class.

Diversification is the only free lunch in investing, and you have already started to broaden your exposure. The next step could be to opt for one of the many multi-asset portfolios on offer. These products combine different asset classes, from commodities to private equity, into one fund. An option is WS Wise Multi-Asset Growth (GB0034272533), which invests in around 30-60 underlying funds and investment trusts, with a preference for out-of-favour areas. I like its focus on high-quality funds, coupled with strong exposure to investment trusts.

For an income option, consider CT MM Navigator Distribution (GB00B80KXN90), which generally contains between 25 and 35 individual funds and targets a yield that puts the fund in the top 10 per cent of income generators in its sector. The fund has consistently delivered a high income with capital appreciation.

In terms of the funds you are considering selling, I do not agree with all of your choices. I would stick with BlackRock European Dynamic. The fund is one of the best in a competitive area, with a genuinely flexible approach and a willingness from the team to constantly refine and enhance the fund’s process. 

I would also hold on to FSSA Asia Focus. This is a solid fund, guided by highly experienced and proven fund managers who are backed up by an excellent team of analysts. The fund has historically delivered better returns than the index and its peers with less risk. It is a strong candidate for any investor looking for an Asian equity fund.

I prefer good active managers with strong track records over passive funds – for global equity exposure, I like Rathbones Global Opportunities (GB00B7FQLN12) and T. Rowe Price Global Focused Growth Equity (GB00BF0S8Y85). Rathbones Global Opportunities has outperformed its peer group by over 20 per cent over the past five years.