Today marks the first year anniversary of the suspension of Woodford’s flagship fund, the LF Woodford Equity Income Fund.
For many investors the situation remains unresolved, with a chunk of their money still yet to be returned and the prospect of this happening by no means guaranteed.
The Woodford debacle will have put many people off investing in funds ever again, and it is hard to argue after such a hefty loss from what many thought was a largely blue chip equity income fund.
For the victims, there is little comfort to be had as we look back a year on from the fund’s closure, but there are some steps that all investors can take to try and help them avoid this kind of outcome.
“This is a painful anniversary for investors who placed their faith in Woodford, with some of their capital still to be returned,” said Adrian Lowcock, Head of Personal Investing at Willis Owen.
“Unfortunately, no one can return investors to the position they were in prior to backing Woodford, but what we can do is look forward to try and make sure investors are never as exposed to such an event again.”
Below Lowcock outlines seven steps investors can take to help them try and avoid the next fund implosion.
Don’t ignore liquidity
Liquidity was at the centre of the downfall of Woodford. The fund was suspended because the exposure to illiquid, unlisted assets grew to significant levels, which would have breached regulatory requirements. Woodford was unable to sell these investments when investors wanted to withdraw their money because of poor performance, meaning he had to sell the listed, liquid stakes instead. This downward spiral became a self-fulfilling prophecy as the illiquid part of the fund automatically got larger.
Don’t assume past performance will be repeated
The mantra that past performance is not a guide to the future is widely used, and for good reason. Past performance does not tell you much about what is going to happen in the future. Future performance will differ for a number of reasons; markets as a whole might perform differently, a fund manager’s style might fall out of favour or the fund manager themselves may have changed their investment approach or gone off the boil.
Past performance is useful information but needs to be taken in context and especially in relation to what the fund manager is doing.
Know what your manager is doing
Woodford was actually very transparent in what he was doing in the fund and where he was investing. However, investors must also monitor their holdings to make sure they are comfortable with how they are performing, and what decisions they are making. It may be useful to get expert opinions and ideas, but it is important to do your own investigations and make sure you are comfortable with what you are buying – it is your hard-earned money after all.
Watch out for style drift
Fund managers tend to find a niche, an approach and strategy that they feel comfortable operating in. As a result, the day-to-day strategy doesn’t change, and fund management becomes quite a repetitive job requiring discipline. Of course, all good fund managers can and should fine-tune their approach as they learn from their mistakes and markets evolve. However, if a manager drifts too far away from their approach this should be a cause of concern and raise a few questions. Does the manager have the skills to invest in the new style? Does the fund still have a place in your portfolio? If you are unsure whether they can, then the best option is to find another fund you are more comfortable with.
We believe diversification is critical to successful long-term investing and the events surrounding the Woodford Equity Income Fund are a reminder of why it is important. If you have only a small proportion of your money invested in a fund and something goes wrong it is still painful. However, it is likely to be more manageable and you can still get access to the rest of your portfolio if you need cash in the short-term.
A balanced portfolio of multiple funds will also help reduce the impact when there are periods of poor performance from a specific fund. Usually another area or asset class will be doing better to compensate and smooth out the volatility of stock markets. In recent years, for example, we have seen that the growth style of investing has been doing well whilst value and income funds have struggled. This may well change in the future.
Choose the right vehicle
Open-ended funds are suited to highly liquid investments like shares traded on major stock exchanges. However, they are often not the best option for investments like property and unquoted shares as it is not always possible to quickly find a buyer for these illiquid assets at sensible prices.
The rules for most open-ended funds allow them to hold up to 10% in unlisted investments. This does not sound like a lot, but when you have money flowing out of the fund quickly and it takes time to sell your illiquid investments, you can rapidly get on the wrong side of the rules.
Investment trusts don’t have this problem as the buying and selling of shares doesn’t affect the amount of money held in the trust. Large sales of the investment trust’s shares don’t result in the manager having to sell any of the underlying assets.
Keep it simple
It is easy to overcomplicate investing and to try too hard. The key is to keep it simple. Some of the best fund managers are those that have their investment philosophy memorised and can explain it in a matter of minutes (or at least demonstrate they understand it). Crucially, investors do not need to be investment experts to understand it either. Manager skill is not solely in their philosophy, it is also demonstrated through execution. The key for investors is to find companies that meet their criteria and to stick to their investment process.
Fund managers are often viewed as maverick or heroic investors, who like to take risks, but the truth is much more mundane. A good fund manager will often spend hours each day reading the latest research and analysis on potential investments. The job is very detailed and fund managers need a lot of patience. Choosing to do nothing is often the right course of action but coming to that decision can take a lot of work.
Adrian Lowcock, Chris Tuite
Head of personal investing Director & Head of Consumer Finance
Willis Owen MRM London
07849 846387 020 3326 9925
Notes to Editors
Willis Owen is one of the UK’s leading online investment service providers. Founded more than 20 years ago Willis Owen now has around £1bn of funds under management and has acted as an intermediary for over 150,000 customers and hundreds of millions of pounds worth of investments,
Willis Owen Limited is authorised and regulated by the Financial Conduct Authority.