Journal

A word on Woodford

Fund managers don’t usually make the headlines but Neil Woodford has attracted a lot of unwanted attention following his decision to suspend the Woodford Equity Income Fund in June.

The fund has performed poorly since its launch in 2014 and investors have been steadily leaving the £3billion fund for the best part of two years. Nearly £600million was withdrawn in May alone, which ultimately led to the fund being suspended (investors are blocked from buying and selling units in the fund until further notice).

Am I invested in the fund?

For the comfort of Arkenstone Wealth’s existing clients, you’ll be relieved to know that your portfolios are not invested in the Woodford Equity Income Fund (more on this later).

However, if your financial affairs are managed by another financial planner/wealth manager, you may want to enquire whether you have exposure to this fund and what their views are on the matter.

If you have investments that you self-manage (perhaps on a platform such as Hargreaves Lansdown), take a look on your most recent valuation to see if you have any money in the fund.

Why did this happen?

Neil Woodford is probably the most well-known fund manager in the UK. During his tenure at Invesco Perpetual throughout the 2000’s, the UK equity funds he oversaw regularly led the fund pack, and his stock and has been high (pun intended) pretty much ever since.

In 2014, Woodford jumped ship and started his own investment management company and £10billion of investor’s capital flowed into the Woodford Equity Income Fund in just first three years.

Sadly for these investors, it’s been a very disappointing experience. I’ll spare you the reasons as to why Mr Woodford hasn’t been unable to replicate his past glories (there are plenty of articles out there explaining this) but there are some important points for investors and advisers to take away.

What can we learn from this?

When it comes to investing, there are two main schools of thought.

Some believe it’s possible for human beings to consistently predict the future direction of markets, identify under-valued or high-prospect shares and know exactly when to get in and out of them at the right time. This is called active management and Neil Woodford is the perfect example of someone who takes an active approach.

Others have faith that stock markets tend to rise over time and that there’s no need to be too clever about getting a slice of the action. Instead of jumping in and out of different shares, passive investors prefer to invest in shares via funds that simply track market indices e.g. FTSE, S&P, Nikkei, etc. In simple terms they’re effectively holding the entire share market or, as my dad once described it to me, “buying the haystack rather than wasting time and money finding the needles”.

Which approach is best?

As you’d expect, each has its merits and drawbacks.

When active management works, it really works well, as Neil Woodford proved in his prime. Investors in his Invesco Perpetual days were enjoying higher returns than those in passive funds and were happy to pay the extra costs to access these returns.

When active doesn’t work, it can be a miserable experience. Underperformance can be caused by active managers either being too aggressive or too cautious, and generally getting their timing and predictions wrong. Sometimes it can’t be explained at all leading many to believe it’s just down to plain luck rather than any particular skill or talent.

In this instance, active investors are not only getting lower returns than their passive counterparts, they’re paying the active fund manager much higher fees for the privilege (as Woodford investors are still doing now).

The statistics don’t bode well for active managers either. Roughly 80% of them tend to underperform passive investments over virtually all time periods.

My thoughts?

I won’t kick a man while he’s down (besides, the queue is too long at the moment) but sometimes things like this need to happen to wake everyone up a bit and to help people understand their choices….and risks.

Naturally, I have my own opinion as to which approach I believe is more reliable (blindingly obvious by this point I’m sure), but in the end it’s the individual investor who has to decide if it meets their values and their view of the way the world works. The problem is that many don’t even realise they have a choice.

For those already working with a good financial planner, your options would’ve been clearly outlined and it would’ve also been explained that relying on performance alone to get you to your life goals is in itself a risk.

Ultimately, an investment portfolio is simply the fuel for the engine that is a person’s financial plan. If the engine isn’t put together properly or near-kaput, then it doesn’t really matter what you’re putting in the tank.

In short, make a plan!

Thanks for reading and do get in touch if you have questions or need some advice.

Simon

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