Less than two-fifths of UK investors would tolerate underperformance for 12 months
Just over a third of UK investors (38%) will give an underperforming fund more than 12 months to turn things around, according to Legg Mason’s 2016 Global Investment Study.
The study, which surveyed more than 5,000 high-net worth investors across 19 countries, found that nearly two-thirds (62%) of UK investors aged 40 or over would sell a fund within 12 months of it starting to underperform. Within this group, the majority (44%) would sell an underperforming fund within six months and 28% within three.
Millennial investors (aged 18-39) have even shorter time horizons, with only 14% of respondents prepared to hold an underperforming fund for more than a year. This makes younger UK savers more intolerant than their global peers, 21% of whom would hold onto a declining product for 12 months or more. Overall, the most common period for holding onto a poorly performing fund was 3-6 months, cited by 35% of UK millennials (the most common period globally was 1-3 months).
When it comes to broader market volatility as an influencer on behaviour, however, both millennials and older investors showed more patience. Older investors said they would tolerate a 16.7% decline in equities before re-evaluating their allocation to stocks, and an 18.6% fall before selling. Millennials were even more inclined to hold their nerve, evaluating their equity exposure after a 20.3% fall and selling after a drop of 23.3%.
Adam Gent, Head of UK Sales at Legg Mason, said: “The survey reveals an interesting dichotomy between investors’ attitude to market falls and their approach to funds that underperform in the short-to-medium term. On one hand, investors seem willing to tolerate reasonably steep market declines before re-evaluating their equity exposure, but only a third will give a fund a year to turn performance around, and 44% just six months.
“It could be argued that this is insufficient time given that many funds have rolling return targets that stretch over years not months, which perhaps emphasises how important it is that investors understand what they hold and under what conditions they are likely to underperform. Investors with a firm grasp of their underlying funds, either directly or under the guidance of an adviser, are those who tend to avoid the classic investment mistakes and perform better over the long term.”