It's time to ditch those underperforming funds

If a football team stopped winning games it would eventually be relegated, but many investors keep losers in their portfolio for far too long. Ditch them and pick one of these winners instead.

If a football team stops scoring goals and winning games, eventually it will be relegated, says Stephen Ellis in The Daily Telegraph. But when it comes to finance, it's up to us to ditch the under­performing funds from our portfolios. Of the 282 funds in the UK All Companies sector that have been around for more than three years, the top 20 have risen on average by 98%. Not bad going. But languishing at the foot of the league, the bottom 20 have returned less than 42%. That's a difference of more than £560 for every £1,000 invested. Even when funds do perform well one year, two-thirds fail to maintain that performance the next in fact, a third end up in the bottom half of league tables. Unfortunately, we don't seem to be keen to make the effort to sort our winners from our losers.

Take the £1bn-plus Newton Income fund, ranked 15th out of 143 funds in its sector for the four years before the departure of manager Robert Shelton in 2002. In the four years since, it's fallen to 111th place out of 231, yet most investors have failed to shift their cash elsewhere. One reason may be that the biggest funds also tend to be among the most heavily promoted. So even though they are underperforming, investors remain persuaded by the volume of newspaper and billboard advertising pushing these funds.

Perhaps if all the time and energy spent on advertising was dedicated to actually beating the market, then fund performances would be better. And in fact, a small group of little-known investment trusts suggests that this may well be the case. As John Newlands of Newlands Fund Research tells The Times: "There is something akin to a secret underbelly beneath the mainstream UK investment trust sector This is a great pity because a number of these secret squirrels' of the investment world boast very good track records."

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London and St. Lawrence, which has a 95-year-old investment manager in Gerald Ashfield, is one such trust. It has returned 90% over the past five years and is currently trading on an 8.5% discount. Gresham House, managed by Alfred Stirling, is another. Over ten years, it would have turned a £1,000 investment into more than £61,000 due to its holdings in private equity and property. We've listed The Times's other picks in the chart above. Our favourite is the £33m Lindsell Train trust, run by Nick Train and Michael Lindsell. It's up by 92% over three years, and mixes UK stocks picked by Train with Lindsell's Japanese stock picks.