Do you have a plan B for your funds?

You should be ready for the unexpected by routinely looking at alternatives to the funds you hold.

Jeffrey Bunce, CFA 10 November, 2017 | 6:00PM
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Jeffrey Bunce: Sun Life Global Investments recently terminated Sentry Investments as the sub-advisor to the Sun Life Sentry Infrastructure Fund because of portfolio manager changes at Sentry following the firm's acquisition by CI Financial. CI replaced Sentry's portfolio manager with a duo from its Signature investment team.

This announcement isn't particularly newsworthy on its own, after all, some fund companies make these type of announcements all the time. What is noteworthy, though, is that Sun Life has hired State Street Global Markets as interim sub-advisor until it can find an appropriate replacement. The announcement didn't detail how State Street would manage the assets but the firm is known for its passive capabilities.

An infrastructure equity strategy is definitely a niche mandate and finding a suitable replacement in short order may not be the easiest thing to do. Moving management of the fund to a passive provider is certainly more preferable than sticking with a manager they've lost conviction in. But at the same time, not having a back-up ready to transition the assets to is far from ideal. It'll likely mean higher portfolio turnover and increased costs as the portfolio transitions through multiple parties. What's more, the prospects for outperformance during this period of transition have likely diminished.

Just like fund companies hiring sub-advisors, this example highlights the need for every do-it-yourself investor to have a plan B for the funds they select. Be it a material manager change, dramatically uncharacteristic performance or a change in the way the fund is managed, the unexpected happens so you should be ready.

A useful exercise is to routinely look at alternatives to the funds you hold and identify ahead of time a back-up so that you can be ready in the event you need to make a change. Of course, having a back-up doesn't mean you should be switching regularly between funds. Your plan B should only be used in the rare case where you have truly lost conviction in your current investment.

For Morningstar, I'm Jeff Bunce.

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Jeffrey Bunce, CFA

Jeffrey Bunce, CFA  Jeffrey Bunce, CFA, is a senior investment analyst for Morningstar’s Investment Management group.

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