Published in the Money Magazine — February 2012

By Peter Freeman

Disappointing returns from many managed funds over the past five years have prompted some investors to cross them off their line-up of possible investments. For some this has simply meant diverting new money elsewhere. Others have taken more drastic action, selling most, if not all, of their existing stake in managed funds. Justine Gorman, a managed funds analyst and head of Australian equities at S&P Australia, says she understands the temptation to react this way but in her view — and that of other investment experts — dumping a fund due to poor short-term returns and continuing uncertainty is likely to be a mistake. There are definitely a number of good reasons why you might want to get out of a fund, but even these have to be carefully assessed before you decide to sell, she says.

What follows is an outline of eight key reasons why an investor might sell out of a managed fund, combined with an attempt to rate each reason as good, bad or possible.

1 Big slump in the market values- Bad reason

Many investors panic when share markets slump. Fearful of further falls, some respond by selling out, either immediately or after the downward slide appears to be intensifying.

This is a bad reason to sell your managed funds, in part because these are mainly growth investments that should not be assessed on the basis of what might turn out to be a short term setback. Many people follow the herd rather than a solid, long-term strategy, says Dale Gillham, head of investment services group Wealth Within. If you develop the latter approach, you should be able to ride out a big market fall without panicking.

2 Poor short-term performance- Bad reason

No fund, managed or super, should be judged solely on its short-term performance, which roughly equates to returns over the past few years. Alex Dun n in, research director at Rainmaker Information Services, says even a fund generating poor short-term returns relative to its rivals usually deserves the chance to recover.

Unless there is some other reason to move your money away from the fund, you should treat poor short-term returns merely as a reason to keep a close eye on the fund, not as a reason to sell out of it straight away, he adds.

3 Fund manager is take over- Possible reason