Oh how the mighty have fallen. Superstar Neil Woodford (CBE) has been in the news a lot recently and things are not so good for him. Shares in his fund have been suspended as nervous savers tried to pull their money out.Of course savers is the wrong word here – they are investors but many many people saw Neil as a safe pair of hands. Someone who had the Midas touch. But when you read the headlines that say:

‘We trusted Neil Woodford with our money’

You realise that this is a bid deal. Woodford and the Woodford aura was able to attract millions of people and billions of pounds into his investment funds including the poplar Woodford Equity Income fund and  Woodford Patient Capital Trust (WPCT). He was recommended as a safe pair of hands by people like Hargreaves Lansdown and St. James’s Place and their platforms directed billions of pounds into his coffers.

(but remember that although they may benefit from recommending him, they never issued any advice and you can’t complain about being missold).

Performance has been poor and investors have started withdrawing their money, first like a trickle and now like a torrent. However Neil is a conviction investor* and has large stakes in small companies that can’t easily be liquidated to pay-out investors who want their investments back. So Equity Income fund is suspended meaning people will now fear the worst! This is a bit of a Northern Rock moment people!

Woodford.PNG
Woodford Equity income performance over 5 years to June 2019

The Rise and the Fall

The ironic thing is that he gained the reputation as being a superstar by sitting out the dotcom bubble back in 1999. he took a contrarian view that paid off – eschewing the tech stocks that people were going crazy over (like Pets.com and Marconi) and from that he gained a reputation and loyal following. When he started his own funds a few years after leaving  Invesco Perpetual  the Pied Piper of Henley took his followers (and their money) with him. Maybe 2019 is 1999 all over again – prepare for a bear market?

As Meryn Somerset Webb says Neil made a few mistakes:

  • Don’t take on too much money, particularly in small-caps.
  • Don’t think it’s all about you.
  • Don’t mix or dramatically change styles.
  • Don’t own too many illiquid stocks.
  • Don’t overtrade.

These are the rules of fund management. But the very thing that made Neil a hero to many is coming back to make him a villain. Just read the articles from people who say:

“I invested in three of his funds due to his reputation. However, over the years I have seen my investments fall by as much as 33%,” says a cautious gambler.

“I have never made any money out of Woodford.” says a greedy saver

Who would have thought investments can go up and down eh? Maybe Neil’s insight into the market has meant that he’ll be judged the Sage of Surrey in 2021 – maybe not – who knows?

What we do know is:

  1. that it’s very hard to consistently beat the market
  2. most people make terrible investors (buying on hype and selling on fear)
  3. passive/index investing has lowers costs and better returns than active investing
  4. putting your faith, hope and money into the hands of someone else doesn’t take away your responsibilities to look after your money

But you might be thinking where’s the personal angle GFF?

Well, I invested my own money in two of Woodford’s funds, in one it went up 15% and I sold and the other it went down 15% and I sold. You win some you lose some. The people who entrusted their savings with Neil Woodford and now have found out that the value of your investments can go up as well as down have learnt a valuable lesson the hard way. I’ve made much worse investment decisions by the way – but what is funny is that I was certain of the superiority of ETFs/passive when I invested, but I still thought that a little Woodford would be good for(d) my portfolio – after all, his fees were low and I liked his investment style (or I was suckered by all the PR). One investment he had was in PurpleBricks – very nice idea and a welcome development to the antiquated housing market.

Wider implications?

Many of the savers investors had put their savings into Woodford (or any other number of actively managed investment funds) and it’s the difference between a saving and investment that people don’t get. There’s no point in average Joes (or Janes) crying when their sure fire, low-risk investment manager fails to deliver the goods. It’s human nature to be short-termed and put on rose tinted glasses whilst reading the Pink.

The sad thing is that for many people they put too much faith in Neil Woodford and thought that they couldn’t lose. I personally think that most people shouldn’t have the easy option to lose money like this and that worrying about where your money/savings/pension is invested is a worry that is not worth having. However, given that:

  • final salary pensions are a thing of the past (for many)
  • stakeholder pensions have rip off fees (if you pay 2% for 50 years, who has all your money/)
  • bank savings pay almost nothing
  • people have misgivings about stocks and shares
  • there are no shortage of people trying to steal your money.

It’s very hard to see what’s the right thing for many to do. And if I did know what was the right thing, I’d not make much money out of telling people – would I? You could just go to the Money Advice Service – but that’s too simple. Even I won’t be cashing in my pension to invest on the markets and I (think I) know what I’m doing.

The biggest causality is Neil’s ego and Middle England belief in an investment messiah. Then again, a fool and his money are easily parted they say – look after yours carefully!

Thanks, GFF

*A conviction investor is not the same as a convicted investor like Berie Madoff. Neil is not in any trouble with the FCA/law.

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Published by GentlemansFamilyFinances

Happy family man, trying to navigate the family finances towards early retirement against the odds.

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9 Comments

  1. I nearly convinced myself to use Hargreaves Lansdown’s Wealth 50. These last few days make me glad I didn’t try to get too smart. Also, love the graphics wizardry in this post!

    Liked by 1 person

  2. Maybe I’m just getting old and curmudgeonly but the Woodford excitement seemed to me conspicuously silly. Like the Elcon Busk fans, people were lining up to be taken for suckers.

    When I was young my father said that in his experience many crooked businessmen had become crooks because they had discovered that they weren’t good enough businessman to make an honest living at it.

    By analogy: investment managers who aren’t sufficiently good at it to beat the market consistently may start taking foolish risks to try to disguise the fact.

    Like

  3. It appears to me that much of Woodford’s problems stem from using an open ended fund, that investors can (or previously could) withdraw cash from, to invest in illiquid assets that can’t quickly be sold. Also the star manager new fund hype when he launched the fund was a warning sign. This story is a learning experience for many, and a costly one for some.

    Like

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