Another one bites the dust?
We’re used to reading in the papers about ‘super star’ fund managers who are able to outperform markets by using their stock-picking skills and market timing (often also called ‘active management’). This week, arguably the UK’s most successful and respected fund manager Neil Woodford, has seen dealing suspended on his Equity Income Fund due to the high level of investor redemptions. So, what’s gone on and should we be surprised?
Woodford gained his reputation at Invesco Perpetual running their £25bn UK High Income Fund which became their most successful investment fund. On the back of this success, other wealth management groups such as St James Place, asked Woodford to run similar versions of this fund under their own labels.
In 2013, Woodford left Invesco Perpetual and set up his own fund management company. Within two weeks of launching the Woodford Equity Income Fund, he’d raised a record-breaking £1.6bn of investors’ money and the inflows continued growing to £10bn.
A downward spiral
After a decent start, Woodford has run into a significant period of poor performance and investors have consequently been making withdrawals. A combination of the two elements has seen the value of his Equity Income Fund fall by nearly two thirds to £3.7bn and this week, Woodford has announced a trading suspension on shares in the fund. This means investors are now unable to access their funds for at least 4 weeks.
Woodford’s fund management style is a combination of a ‘value’ strategy and high conviction – building up significant stakes in some of the companies that he invests in. But both these elements have conspired against him. Value companies (companies whose share prices are out of favour and are seen as relatively cheap) have underperformed growth companies (companies whose earnings are expected to grow no matter what their current profit status). Added to this, some of Woodford’s high conviction positions have turned into disastrous stock picks – Kier, Prothena, Allied Minds, Purplebricks and Provident Financial to name a few, all of which have lost at least 70% of their original investment value! (Guardian, June 2019).
The Equity Income Fund has also invested the maximum 10% allowed under the regulations into unquoted companies. As investors have pulled money from the fund due to poor performance, Woodford has had to sell his most liquid stocks to repay investors. But as the fund value has fallen, the proportion of his illiquid unquoted companies (which can’t easily be sold) has increased, breaking the 10% threshold. Finally, many hedge funds have also cottoned on to Woodford’s predicament. They’ve ‘shorted’ many of the stocks he holds by selling the shares borrowed from other institutions like pension funds, only to buy them back at a lower price and pocketing profit.
So, what can we learn?
- Firstly, understand what you are investing in. Many investors are shocked by the events of this week and will have had a nasty shock learning about the fund’s exposure to illiquid unquoted companies.
- Don’t rely on past performance. Woodford has long been held as a stock-picking guru and many investors will have invested based solely on his previous reputation– something which they won’t have benefited from!
- Active management underperforms in the long run. Whilst evidence suggests that a small minority of active managers may outperform markets over the long-term, the vast majority underperform especially after costs. Using passive, or index tracking, funds is much more likely to deliver the returns investors need.
- Diversify. Spreading your risk, so no one company can have a large impact within your investment portfolio remains the investors only ‘free lunch’ and friend.
- Liquidity. Ensure that if you need to access your investments, you can! Or at least make sure that you have sufficient access to cash to ride out periods when you can’t.
Woodford may yet still turn around his current predicament and in a few years, if some of his value companies perform, he may once again be crowned a stock-picking star. Unfortunately, many investors locked into the Equity Income Fund will be currently regretting their investment decisions and perhaps wishing on another star!
If you’d like any help with regards to your investments and wider financial planning, please get in touch.