Neil Woodford – a cautionary tale
Digital Life Matthew Webster
Financial firms should make sure their vulnerable customers are not disadvantaged, said the Financial Conduct Authority (FCA) in late February.
It is shocking that the City regulator believes it necessary to give such a warning to the people we pay to look after our money.
The FCA itself is often criticised for not doing enough to protect investors from scandals, the latest being the Woodford affair, which has rocked the fund-management industry to its core.
Neil Woodford had been a fêted fund manager with a successful long-term track record. When he set up on his own, thousands of his followers invested in his flagship Woodford Equity Income fund.
This started by living up to its name, investing mostly in solid, blue-chip companies that paid dependable dividends. At its peak, it was worth over £10 billion. But Woodford was quietly changing his strategy, which made the fund more risky.
He started buying stakes in unquoted start-up companies, many of which did not yet make profits, let alone pay dividends. Some institutional investors noticed and began withdrawing their
money. As the fund’s performance became unrelentingly worse, more clients bailed out.
By the time small investors wanted their money back, Woodford was unable to pay them. His new-style holdings, comprising two-thirds of the portfolio, were illiquid and difficult to sell.
In 2019, the fund, now worth only £3.7 billion, was first suspended and then wound up. The underlying investments are being sold off, forcing investors to take substantial losses. They are still waiting for a final payout, which might come later this year. Woodford was sacked, his reputation in shreds, though he wants to set up a new fund targeting the professional market.
Small investors thought they had invested wisely, on the basis of advice from independent financial advisers and Woodford’s reputation as a star stock-picker.
If the people you trust to take care of your money let you down, what can you do to keep your money safe?
Above all, you should take an active interest in your money, whether you use a financial adviser or not. Look for a fund manager with a steady, long-standing record. Do not simply pick a fund from a best-buy list. Before you choose a fund, check where your money will be invested. Search online for its name and you will find fact sheets and detailed information about it.
Every six months, check how well the fund is performing compared with others in the same sector that match themselves to the same index, such as the FT All Share index. Make sure it still meets your requirements in terms of growth and income and still has the same strategy.
Do not monitor performance every day, because all funds go up and down in price in the short term and you must accept that every fund manager can make mistakes. Check whether the fund has shrunk in size: if it has, that could indicate that those in the know are pulling out.
Do not put all your money in one place. Diversify your investments in different shares and stock markets, and among several different fund managers. Contact them if you have any questions and remember that, as Woodford demonstrated, past performance is no guarantee of future success.