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Every week, Kyle Caldwell and guests take a look at how the biggest stories and emerging trends could affect your investments, with practical tips and ideas to help you navigate your way through. Join the conversation, tell us what you want us to talk about or send us a question to OTM@ii.co.uk. Visit www.ii.co.uk for more investment insight and ideas.
Hello, and welcome to the latest episode of On The Money, a weekly show that aims to help you make the most out of your savings and investments. In this episode, we're gonna be discussing the top tactics when considering whether to sell a fund, investment trust, or an ETF. Joining me to discuss this topic is Dave Baxter, who is senior fund content specialist at Interactive Investor. Dave, welcome back to the podcast.
Dave Baxter:Thanks for having me.
Kyle Caldwell:So, Dave, firstly, let's discuss very briefly why is it harder to sell than it is to buy. I think some of this is rooted in behavioral finance. There's that famous quote, the the fear of loss outweighs the equivalent pleasure of gain. Any other thoughts?
Dave Baxter:I think that's it. It's psychology, isn't it? It's kind of like fear of loss, general caution, and also, I guess, buying something is more exciting. So when you're buying, you're kind of alerted to these positive trends or these exciting investment opportunities, and that seems very alluring. You know, you're doing something new.
Dave Baxter:You're taking action, whereas selling is kind of less of a a a glamorous event, I suppose.
Kyle Caldwell:I think there's also the fear of missing out as well in terms of adding new investments, but also in terms of your of your existing investments. If it's been a weak period of performance, you then fear missing out on a potential recovery occurring.
Dave Baxter:Yeah. Definitely. Yeah. The kind of crowd's mentality is quite powerful in this space.
Kyle Caldwell:Before we move on to the tactics that we both come up with in terms of considering whether to sell a fund investment trust or ETF, let's very briefly cover off rebalancing. So this is a very useful way to ensure that the risk level of a portfolio is maintained over time and that you don't become overexposed to a particular type of investment theme or sector?
Dave Baxter:Yeah. So to give an example, say you've built your portfolio and you've done, you know, what used to be the classic balanced portfolio. You have 60% in equities and 40% in bonds. You then give it I mean, people often do rebalancing perhaps something like once a year. So you might look at your portfolio year on and say that with 2025 equities performed really well, so you probably would have seen the equity portion increase substantially.
Dave Baxter:So what you're doing with rebalancing is I mean, there's a couple of different ways to do it. One way is to kind of take some profits, in this case, on those equities and kind of reallocate into bonds so that you're back down to $60.40. Or another kind of method that's a bit more incremental but maybe a bit easier in terms of logistics and trading costs and stuff is if you're still investing new money, you could just put the new money into the bonds and then wait until you hit that sixty forty again.
Kyle Caldwell:Let's now move on to what are the key things to consider when reviewing a portfolio. Let's cover off funds first. So, firstly, when examining whether to stick or twist with a fund Yeah. I think the first thing to consider is performance, whether or not he has outperformed over particular time periods. But as you've mentioned previously on the podcast, Dave, it's perhaps more useful to look in terms of a particular point in time in the context of the fund's style rather than looking over at a specific time period.
Dave Baxter:Yeah. I think for me, it's not always whether a fund has done well. It's more whether it's done as I would expect it to do. So for example, last year, value funds performed really well. So if I'm investing in a value fund and it's had a really kind of lackluster 2025, you want to go and ask why has it done that, why has it not performed better.
Dave Baxter:And equally, I mean, people perhaps disagree with this slightly, but if you're, say, one of classic quality funds like Nick Trains funds, maybe some people would give that a bit more leeway because that style has been struggling. So to an extent, it's performing the way you would expect it to.
Kyle Caldwell:But, ultimately, over the long term, you want the fund to outperform the alternative, which is the market. Yeah. And nowadays, you can buy the market at very low cost through an index fund or an ETF, particularly if it's a developed market like UK, US, or global. Yep. In most funds literature, they say, give us a minimum of five years to judge our performance.
Kyle Caldwell:So I think that is an important time period to look at. But, also, you do wanna look a bit longer than that as well. I think if a fund has a longer term track record, make use of all of the available data that is out there, and then make a judgment call on whether you think in future the fund strategy or style has the potential to outperform a compatible index.
Dave Baxter:Yep. Yep. Consider how it's performed in different conditions and what it tends to do when markets struggle when a certain style does well and so on, and that should hopefully give you a rough idea of how it might perform in future.
Kyle Caldwell:The next thing to consider is the full manager or the full management team that are at the helm. So, firstly, you need to consider, is it still the same full manager full managers that are running the money? Because if this is if if because if this is not the case, then ultimately, the the shape of the funds and how the funds invests, it may have changed as a result of that.
Dave Baxter:How convinced on that point are we of the kind of team approach mantra? Because over the years, fund firms have got a bit nervous about kind of big name managers leaving, and they've always, you know, started emphasizing the fact that, oh, this is a team, so if someone goes, then it's not really, you know, of consequence.
Kyle Caldwell:My personal view is that there there still should be someone who's someone who's at the top of the tree who is accountable for performance.
Dave Baxter:Mhmm.
Kyle Caldwell:I think it's fine to have a couple of co managers running the money, but I think the but I think, ultimately, what what I don't want to see is a fund it just say it's a team approach, and there's no names managers names. I think it's very important. There's accountability for performance.
Dave Baxter:Yeah.
Kyle Caldwell:And in terms of if the full manager leaves, it's not necessarily an instant sell because the new full managers that are put in place, they may come in and do a very good job. But I think for me, if it's if, you know, if I bought a fund and the full manager has changed, I'd certainly do a review. And I'd be thinking, where does the full manager gone? Have they gone to a competitor? And I would then consider potentially going with the fund manager if one of the main reasons I bought the fund was because of who the fund manager is.
Dave Baxter:It's interesting to, I suppose, look at, say, the fund job in in the first instance to look at it kind of how it changes from manager to manager because sometimes you see, yes, they are following roughly the same process, but you'll actually see a decent amount of churn where, you know, the new manager doesn't like this stock and this other stock, they decide to get out of it. So it's worth monitoring how much the portfolio actually changes.
Kyle Caldwell:Agrees. And I think full manager tenure is very important as well. Mhmm. I think if a full manager's been in place for ten years or more, think that's a very good sign. I think that's a good sign that they're potentially gonna remain at their post.
Kyle Caldwell:And I think it's potentially a good sign that their performance has kept them in that position.
Dave Baxter:Although, is it also good, I suppose, to have kind of a younger co managers and so on coming on in time? I I think one of the potential drawbacks of being a very experienced manager is maybe you could argue it's easy to kind of not keep up with the times or keep applying, you know, approaches that maybe don't work in different, you know, evolving markets?
Kyle Caldwell:I think that's where it can work well. If there's a a lead manager that has more experience under his or her belt, and then the co manager or couple of co managers, they are younger, and they're sort of learning on the job, becoming more experienced. And in future, they will potentially take over the funds. I think that's a really good sign of good succession plan, and I think that's something for investors to consider when a full manager does retire. The next thing to consider is whether the funds is experiencing a significant amount of outflows.
Kyle Caldwell:Dave, could you explain what this means in practice?
Dave Baxter:Yeah. So it basically means that on balance, on a sort of net basis, investors are withdrawing more more money from the funds than is being put into the funds. This is, of course, an issue for open ended funds. So, you know, investment trusts have their own problems but different dynamics. It can become a problem for open ended fund managers because, basically investors are asking for their money back and they need it back within, you know, a few days.
Dave Baxter:So you need to either hold a high level of cash in the fund or you need to sell assets in order to kind of meet those redemption requests. That becomes a problem if, you know, more particularly if you have less liquid investments, if you have, like, smaller companies, that kind of thing, partly explains some of problems with the Woodford crisis many years ago. And also, it's just problematic because it can force managers to focus on what they can sell. It can force them to kind of sell down winning positions sometimes in order just to deal with this. Yet sometimes it becomes a bit of a vicious cycle in my opinion, and it can lead to I mean, very extreme cases, but it can kind of lead to the slow gradual demise of the fund.
Kyle Caldwell:We've seen over the years, there have been a number of examples of funds that have experienced sizable outflows, and then they've really then struggled to attain the performance around.
Dave Baxter:Yeah. There's the performance side, and there's also just once you you know, we talk about this a lot with investment trust, but it does also apply to open ended funds that you can get to a size where you're not really viable. I mean, with open ended funds, it just gets to a certain size where for the fund manager, it's not commercially viable as they put it, and then the fund will just disappear or it will get merged into some other fund that isn't always exactly the same thing.
Kyle Caldwell:And as you've mentioned, you know, if if a fund is experiencing a high level of outflows, then the full manager can often be compelled to sell their most liquid holdings. So the holdings that are the easiest to sell, and it might necessarily be the holdings that they actually want to sell. And so as you mentioned, they can become a full seller.
Dave Baxter:Yeah. And, also, if you do that, your portfolio over time becomes less liquid because you're just more exposed to those those trickier to sell investments.
Kyle Caldwell:And other things to watch out for are whether the style of the funds is the same as when you bought it, and also whether the area of the market that the fund is focusing on is the same as when you purchased it. I do think sometimes, particularly with, say, a UK small companies funds Mhmm. Sometimes you see when they're successful and they're getting money into the funds, it reaches a certain size. And then as the fund becomes bigger, the fund manager then becomes more compelled to buy mid cap companies. Yep.
Kyle Caldwell:They have to move up the market cap spectrum. So you're not necessarily getting that sort of pure play exposure to UK smaller companies anymore.
Dave Baxter:Yeah. And you also famously saw this with Fundsmith Equity, you know, when the fund was much smaller. I think they referenced Domino's as a kind of holding that the fund is too big to hold that now. So in theory, it means that they are holding kind of, I suppose, less growth y companies than they used to. So the profile of the fund and what you might expect from it is actually different now than it was ten years ago.
Kyle Caldwell:Let's now move on to investment trusts. So a lot of what we've just said applies to investment trusts, but due to the structure being different from open ends of funds, a key thing to watch out for when you own an investment trust or when you're weighing up whether to buy an investment trust is the level of premium. Of course, over the past four, five years, most investment trusts have been trading on a discount and a pretty heavy discount Mhmm. At that compared to history. As a rule of thumb, I don't like to see an investment trust premium rise above 5% and certainly not 10%?
Kyle Caldwell:Because we've seen lots of examples, including in more recent times, of high premiums just simply not being sustainable.
Dave Baxter:Yeah. I mean, last week, three r group, the private equity trust, went to I mean, it must have at some point in the past, but it went to a very rare discount. And then if we think of, you know, late twenty twenty five, it had been on a premium of as much as 60%. And then there were some concerns about its kind of outlook and the shares have tumbled and tumbled and tumbled. So if you bought in that really high level, then that just leaves your price, you know, quite a long way to fall.
Kyle Caldwell:And for investment trust holders, is a potential new item on the list to consider regarding whether to sell an investment trust, whether or not Saba Capital, The US activist investor, is on the shareholder register?
Dave Baxter:I think, yes. I mean, people have very different personal views in this. Mine is that if you're already holding a trust and you see Saba get onto the register, then you may as well kind of wait and see because SABA might push for something like a tender offer or what we're potentially seeing with things like Herald and Edinburgh Worldwide is it might actually take control of the trust if it can, which again might give you as a shareholder an exit. So you could have a way to get out at a bit of a profit, at least current valuations. But if I were considering investing in a trust for the first time and I saw Sabra have been a major investor on the register, it might make me just step back and, I don't know, be a bit cautious because, yes, you could find a profitable way out if Sabre forces something like a tender.
Dave Baxter:But would is it a bit of a waste of time researching that fund and then having to exit and then go somewhere else?
Kyle Caldwell:I completely agree. I think if you don't own the investment trust and you see SABA on the shareholder register, then potentially in future, how that investment trust invests may change. So as you've mentioned, is it then worth the hassle of then buying it for that for it then to be changed in future?
Dave Baxter:I mean, I guess if you're following Saba into investment trusts, you're almost acting like Saba, and you're kind of hoping for a a short which is, you know, a valid approach, but you're you're hoping for a kind of short term gain. But if you're more interested in kind of accessing the theme over the longer term, then maybe you want to go elsewhere.
Kyle Caldwell:And an example of an investment trust that's not gonna exist in the future in the same form as it has done is Edinburgh Worldwide. So the board has announced that it will be given shareholders a tender offer. So in other words, shareholders are gonna get an escape route close to net asset value. What what are your thoughts on this latest development, Dave?
Dave Baxter:I think it's well, it's interesting. In one way, it's a shame if we're just gonna see Edinburgh worldwide in its form kind of disappear and, you know, the investors won't be able to use it to try and target these kind of exciting global small cap companies and so on. What I found really interesting though and a positive I mean, to their credit, the Edinburgh Worldwide Board do seem to have tried to exhaust all different options with Saba, and Saba now seemingly want to just take control of it, I think. But one thing to be praised is the fact that this tender offer is not just an exit close to NAV. What they're gonna do is they want to give people 75 percent of their cash if they take part in this tender, and then they wanna give them cash later on related to uplifts from the trusts holding in SpaceX.
Dave Baxter:So they're basically saying we don't want investors to be traps well, to be stuck between either being trapped in a cyber control vehicle or missing out on the upside from SpaceX, is kind of seen as the jewel in the crown of this trust. So it's probably a dissatisfying option for people who wanted to stick with the trust, but it's a better option than simply getting out.
Kyle Caldwell:I feel like the board's doing making the best of the situation, and they're protecting shareholders' interests in doing that, particularly in regards to, you know, retaining the investments in SpaceX. I mean, lots of press reports that at some point, the company is gonna have an IPO. So I think it would have been a shame if, you know, the shareholders not gonna benefit from from a future scenario if it does prove to be beneficial. Yeah. So let's move on to index funds and ETFs.
Kyle Caldwell:So, obviously, an index fund ETF, they don't have a full manager, so you're not gonna consider that. And there probably is less involved in terms of when you're reviewing your position in an index fund or an ETF, particularly if it's like a traditional index fund or ETF that's giving you exposure to a major mainstream market, such as the S and P five hundred, Footeal share, etcetera. However, there are some things to consider. I mean, one of those is whether the composition of the index, how that that you know, over time that changes, you know, the the allocation to countries, sectors, industries, and indeed the the companies does change over time. And at this point in time, if if you own a global index fund or ETF, you might be comfortable with how much it has in The US, typically around 70%.
Dave Baxter:Yeah. That's a big issue, isn't it? It's a lot of kind of single country risk in a seemingly global products. And I think it's interesting. You know, that's the most obvious obvious example that jumps out to people, but it's not the only risk within a kind of conventional tracker fund.
Dave Baxter:Another obvious one or obvious two, I suppose, are with MSCI Emerging Markets or, you know, Asian trackers. It's a very exciting region. It's kind of come back to life in the last year, but there are some very concentrated bets there. There's notably kind of China makes up a big chunk of it and now areas like South Korea, Taiwan. But also TSMC, the chipmaker, which has been a very fashionable stock to hold because of the AI boom and so on in recent years, that makes up, I think, something like 14% of the index.
Dave Baxter:So that's just a huge position in itself.
Kyle Caldwell:And all the things to think about is the yearly charge that the index fund or ETF levies. Because over time, certain fund providers do reduce their fees, in the passive fund space. And if you're in an index fund or an ETF that, say, is charging the same as it was ten years ago, it may may no longer be compelling and the cheapest option for you. You might be able to find an index fund or an ETF tracking the same market that is, in percentage terms, quite significantly cheaper.
Dave Baxter:Yeah. What's really interesting is with some of these mainstream trackers, so with with, say, like a US global tracker, any of the mainstream markets, wouldn't expect to pay as much as even naught point 1%. You would expect to pay less than that in terms of your headline fee. You might assume with those funds that prices can go no lower and you've already got this amazing deal because you're paying 0.07% or something. But actually, in recent years, particularly with US and global trackers, you've been seeing a massive price war even if it's cutting by naught point naught 1%.
Dave Baxter:So it is worth just keeping an eye on what's going on and shopping around.
Kyle Caldwell:Because a couple of metrics that you can look at are tracking error and tracking difference. Without going into the detail right now on the mechanics of both of those metrics, one of the most important aspects is the fund fee. And if you have a lower fund fee, you generally tend to have a lower tracking error or lower tracking difference for an index fund or an ETF. Yeah. Another thing to consider is how frequently the index fund or the ETF trades.
Kyle Caldwell:So look beyond the yearly fee. If you look at the a cost disclosure documents for an index fund or an ETF, you'll be able to see the transaction costs within that document, and that shows how what the costs have been for the index fund or ETF buying and selling over a particular period is in the case for the documents over a one year period.
Dave Baxter:Yeah. Also, I guess one useful metric that kind of brings together these different factors is the kind of net returns figure, if you can find it, because that will, you know, draw in all of those different variables and give you what the outcome has been.
Kyle Caldwell:Dave, thanks for covering all of those key points.
Dave Baxter:Thank you for having me.
Kyle Caldwell:And thank you for listening to the latest episode of On The Money. Hope you've enjoyed it. In the meantime, you can find plenty of analysis related to funds, investment trusts, ETFs on the Interactive Investor website, which is ii.co.uk. And if you have an idea of a topic or you have a question that you would like one of us to tackle, then please do get in touch by emailing otm@ii.co.uk, and I'll hopefully see it again next week.