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Reasons to sell 

Dumping a fund doesn't mean it's bad

By far the recommendation that requires the most explaining is the decision to sell. I'm not talking about market timing. Rather, I'll often get asked why an otherwise good fund was a sell recommendation in a portfolio I've reviewed. This week's article will, hopefully, clarify my reasons for showing a fund the door.

Very simply, if an investment is deemed to be inappropriate for your circumstances, it may be recommended that it is sold. An example would be an individual who will start to draw an income from his/her portfolio within three years but has a holding in a labour sponsored investment fund (LSIF). In such a case, the LSIF should occupy a very small place in the portfolio, if any at all, due to its mandatory eight year holding period. If the holding is too large (or if it's contrary to the investor's risk profile), it will make the list of sell recommendations.

Most of my sell recommendations results from the fact that most portfolios that I've reviewed contain far too many mutual funds. As a result, diversification is poorly executed and many funds overlap each other. Inevitably, this results in sub-par performance over time. For instance, holding five Canadian stock funds will likely result in many of the funds holding many of the same stocks. In such a case, it may be recommended that one or more funds be sold to eliminate overlap and improve diversification.

If I'm reviewing a portfolio holding both Mackenzie Ivy Canadian and Trimark Canadian, I can guarantee you that I will recommend selling one of them. Yes, they're both good funds, but as we saw a few weeks ago, these two funds are not good compliments.

As market prices move over time, your asset mix may require some fine-tuning to bring things back into sync with your original or target asset mix. This can also be seen as a form of profit taking since it usually involves selling some of what's done well to add to what hasn't. In taxable accounts, where taxable gains can result from selling profitable investments, rebalancing may be better accomplished by simply redirecting additional contributions according to your rebalancing needs.

Suppose you invest $5,000 into stocks and the same amount in bonds. After five years, you find that your stocks are worth $8,500 while your bonds are worth $5,500. Your asset mix has changed from 50/50 evenly split between stocks and bonds; to 61/39 in favour of stocks. Let's also suppose you plan on adding $3,000 of additional money to this portfolio. Rather than sell some of your stocks, which would trigger a tax liability, simply adding all of the $3,000 to your bonds would bring the mix back to a 50/50 split. Rebalancing has been accomplished in this case, but with no immediate tax consequences.

Fundamental Changes
Change is the only constant, they say. The same is true of the mutual fund world. Changes can take many forms, such as a merger with another fund, change in mandate, change in managers, change in fee structure, etc. Whenever a fund undergoes some change, it will be evaluated to determine if the fundamentals which prompted the initial buy have changed. (See last week's article for reasons to buy. If the changes are deemed to be significant, a sell may be recommended.

Bottom line: In order for the fund to remain in the portfolio, it should have a unique role to play. If it doesn't or if there are better ways to fill that role, a sell may be in order.

Inferior Fund
There exist many investment funds unworthy of your money. Very simply, if you currently hold a fund that is deemed to be a poor investment, it may be time to part ways. In this recent article, I explored some of the industry's black sheeps.

If a fund is deemed to be inefficient, subject to the Efficiency factors listed in last week's article, it may be a good sell candidate. Inefficiency generally results from high fees (i.e. MER - management expense ratio) and heavy trading.

Inconsistent Behaviour
Sometimes a fund acts in a manner that contradicts its stated style or mandate. In the event of such an occurrence, the activity should be evaluated and a judgement made as to whether the action was an anomaly or a definite fundamental change. For instance, a small cap manager may have holdings in large cap stocks. If the manager actually bought the stocks when they were small caps and has simply held onto them as they've grown, we probably won't recommend selling the fund. However, if the manager was found to have been cheating and had bought large cap stocks (i.e. to boost performance, reduce risk, etc.), I will likely recommend selling it.

While no buy/sell methodology is perfect, having a disciplined process and concrete reasons for taking action will help reduce emotion-driven investment decisions. When emotions drive investment decisions, the outcome usually stinks. Establishing your own criteria for buying and selling will hopefully improve your behaviour and ultimately your bottom line.

Dan Hallett, CFA, CFP is the President of Dan Hallett and Associates Inc., an independent investment research firm based in Windsor, Ontario. Dan can be reached at


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