Switched a Fund, Reluctantly (7 Sep 2009)

I just switched from one Asia ex Japan fund to another today. I would normally always advise against doing this. Chasing fund performance, especially within the same sector is not a thing one should usually do. Fund managers each have their own styles, and you should usually give them some time to really confirm that they are underperforming before you decide to switch.

In my case, it wasn’t a case of underperformance either. I was quite happy with the performance of DWS Asia Small/mid cap fund. It had returned me close to 40% since I bought it.

The problem was that the fund house itself wants to close the fund. Those of you who have the email should have received the email from us by now. They just had an EGM to close the fund, it didn’t pass. Now they are going to propose another one. Now, I actually like small caps right now. I think blue chips have gone up to a certain extent, and it’s many of the small caps that are lagging.

While the risks are higher for small caps, that is precisely why getting exposure to them via a small cap fund makes sense. Even if one or two fails, it would hardly impact the fund, and in the meantime, if the other small caps in the fund moves up strongly, it would more than make up for the few that fail.

But in this case, the fund house seems determined to close this fund. And if I were the fund manager, it would certainly come as an unwelcome distraction. How well can you concentrate on running a fund if it could potentially get closed within the next 3 months? As an investor, the uncertainty is also not a good thing. So, I decided to switch out of this fund. But because I still like Asian small caps, I had to do what I normally would not advise people to do. I switched from one Asia fund to another Asian fund, and their objectives are similar. Both are small cap focused.

The new fund I have switched to is Aberdeen Asia Smaller Companies. While it is not easy to run a small cap fund. I am confident that Aberdeen has the expertise to do it. I did not want to switch to a more typical Asian ex Japan fund because I already had those. I wanted specifically one that was focused on small caps.

Based on the overall performance that the fund has shown over the past few years, I chose Aberdeen Asia Smaller Companies. The fund has the best 3 year track record amongst the funds in this category. And it had also fell the least during the tough times in 2008. While it has underperformed in the initial run up compared to the other funds in this category, it was because the fund manager did not want to chase up the frothier sticks with no fundamentals. And I share a similar view in that in the medium term, the stocks with the stronger fundamentals will shine through.