Woodford lessons

Fri 14 Jun 2019

By Ruairi Dennehy

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It is natural for investors, after a debacle such as we have seen with Woodford, to simply stick their heads in the sand. It is also just as likely that investors who went nowhere near Neil’s fund will also stick their head in the sand and think “This will never happen to me!”

It is natural for investors, after a debacle such as we have seen with Woodford, to simply stick their heads in the sand.  It is also just as likely that investors who went nowhere near Neil’s fund will also stick their head in the sand and think “This will never happen to me!”
Instead, the more pro-active and wholly sensible approach is to reflect on what we have learned from this episode, and how we can harness it to make us better investors moving forward.
So what lessons have we learnt?
1)      Stop Buying Funds on a Whim (Blog from 2014)
If you think back to the huge success of Woodford’s recent fund launch, much of that was driven by:
  • His profile as a fund manager
  • A very well-choreographed marketing campaign
If investors had looked at recent performance, they might have been less enthusiastic. 
Will the Woodford style of investing be a positive or negative over the next 12-24 months?  No one knows – sidestep anyone who says they do!
2)      Don't follow the herd or fall in love with the story
Time after time when I speak with new clients, or clients who have holdings long before they become our clients, I hear the same reasons as to why they bought an investment…
“The fund manager is brilliant”
“The marketing was amazing”
“My friend said they’d made stacks of money from it”
People do genuinely think they aren’t silly enough to fall into these traps, but I’ve heard hugely successful & wealthy people admit to me they’ve bought an investment because of an advert alone.
We did a short blog on some bad investor habits couple of years back, feel free to have a look here.
3)      Make time for your investments
A good habit to get into for any investor is to keep a checklist of what you bought (and sold) and why. Reviewing this regularly you will quickly see interesting patterns and behaviours about yourself that you wouldn’t otherwise have known. Ultimately, this Woodford episode should be a wakeup call for investors. It is your money.  You should find the time to monitor your investments. After all, no-one cares as much about your money as you do.
Alternatively, if investors struggle to keep tabs on their investments, whether it be due to time constraints, work pressures or lack of understanding, they should seek professional advice to help guide and navigate them through the turbulent times that are inevitably ahead.
4)      Should you buy a new fund? (Blog from 2014)
Here’s what we said back in 2014:
Our view is that buying new launches is mostly pointless unless the fund is unique, for example providing access to an asset class or strategy not available elsewhere – this fund doesn’t meet either of those criteria.  So we would wait at least 6 months before considering the fund, and then begin to compare the actual performance with the many alternatives.
In the meantime, there are plenty of outstanding alternatives, in fact 122 better funds if you are investing for growth (based on the last 5 years of performance).
Despite these reservations of ours, many Woodford fans will buy the fund, plus a phalanx of others seduced by a shiny new fund and compelling marketing, but little else of relevance to whether this is likely to be a good, bad, or indifferent investment. That will be enough to make this one of the biggest fund launches ever.
Why buy a new fund with no track record when you can buy an existing fund with an established track record?
Say “thank you but no thank you” to the wall to wall marketing.
5)      Don’t Fall In Love With Fund Managers (Blog from 2016)
Even if the manager of your fund remains in place, many investors stick with him or her long beyond the point when this is justified by the performance.  If it was an emotional decision to buy the fund (it might just have been the impressive advertising) very few people enjoy going back over mistakes – it is like having your arm broken (again).  
Of course, many other investors are lazy or inert, or distracted by day to day life, or aren’t aware that there is a huge difference between the best and the rest.  
Moreover, they don’t realise that becoming an outstanding fund investor is not difficult – and the substantially greater returns are genuinely life changing. 
6)      It’s hard for retail investors to try and grasp what’s going on within a struggling fund. They shouldn’t have to.
Not many people have the time to check weekly, monthly or even every six months.  Retail investors especially, shouldn’t have to regularly ‘check up on’ fund managers and their trades, and rightly so.
In their mind, fund managers are highly skilled and experienced professionals who invest assets in line with a defined structure of rules and parameters. Most investors did not, and will not, understand rules such as the 10% rule on unquoted share levels. And they shouldn’t need to, the rules are made by the FCA, and so should be governed and enforced by the FCA. 
The onus shouldn’t be on investors to keep tabs on a manager and determine whether or not they are following the rules. This should be the responsibility of the FCA.
Nevertheless, we can’t avoid the fact that many investors would’ve seen and heard about the warning signs (including the ridiculous levels of unquoted shares, which we covered in March 2018 here) and ignored it, why? “Because it’s run by Neil”.
Our view is that you should sell if you haven’t already, as the risks are growing for the fund.” (Blog from March 2018)


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