When to sell your holding in a trust

Deciding when to sell a holding that has been in a portfolio for a long time can lead to crippling indecision. But investors need to sell, both to realise profit if the investment has done well, and to exit a poorly performing holding (if buying was the wrong decision in the first place).

The idea that one can buy and hold an investment forever is fiction (unless you’re content to hold an index fund for life). Moreover, it is vital for investors to continually review and reevaluate their positions to determine whether or not they fit their original investment criteria. That’s why the process of selling is, in my opinion, the most important skill for investors to master.

When to sell struggling funds

If you have a struggling fund in your portfolio, when is the right time to sell? We look at what to consider when selling your holding in a trust.

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There are many struggling funds out there, and investors are leaving in droves. Some of the biggest recent disasters include the SDL UK Buffettology fund, which has seen its assets under management dwindle from £1.8 billion to below £500 million. The Jupiter UK Mid Cap fund has seen its assets slump from £3.5bn to under £450m in a few years. These funds have failed to live up to investors’ lofty expectations and they are not the only ones. Active investment funds have borne the brunt of the selling as they’re easy to exit, but investment trusts have also felt the pain.

Take the Finsbury Growth & Income Trust, managed by one of the UK’s star fund managers, Nick Train. Over the past five years, the trust has produced a net asset value (NAV) return of 14.4%, compared with 37.3% for its FTSE benchmark. As the trust has been trading at a deep discount to its assets for some time, and has been buying back shares to reduce the discount, net assets have fallen from £1.72 billion to £1.66 billion over the same period.

Capital Gearing Trust is another example. Its continual repurchasing of shares to try to reduce its discount has pushed assets down below £1bn (assets have declined by 23% since the end of 2023 compared with a total return of approximately -8%), and as fees are charged on net assets, fees as a percentage of assets have risen.

The first stage of deciding when to sell starts when you buy the fund. All too often investors acquire a fund without understanding what they own. It’s not enough to just buy a fund because it has made lots of money over the past five years. Past performance is no guarantee of future returns.

Instead, investors must understand the factors that have contributed to performance, and they must be behind the fund manager’s strategy. If you understand the strategy, it’s easy to gauge whether a manager has deviated from it. That in itself is a reason to sell. Neil Woodford was a fantastic UK equity-income investor, but when he strayed into speculative small-cap venture investing, he stepped out of his comfort zone.

If a manager hasn’t deviated from the strategy, it should be easy to assess what’s gone wrong. It could be the market, poor stock selection, or country selection. In most cases, if a manager hasn’t deviated from their approach, it’s essential to evaluate their performance against other metrics over a long period of time – three to five years.

There is no magic formula to determine if a manager has lost their edge or has made too many mistakes. It’s always going to be more art than science, but it’s important to give them time to prove their worth and ensure that they are not being dismissed as inadequate simply because they have been caught in a short-term market downturn. A period of three to five years is enough to see if the manager can stack up against peers, or can recognise their errors and change direction.

If performance continues to deteriorate, then it could be time to sell. Loss aversion (trying to avoid losses by holding on to poor investments) is one of the most damaging psychological biases. It might be painful to take a loss, but there are always new opportunities out there.

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