Difficulty for Neil Woodford’s fund (which is essentially a pool of lots of different investors’ money) began after a period of underperformance caused investors to withdraw their money in big numbers back in June of this year. This flood of withdrawals caused Woodford to ‘suspend’ his fund. This means that to avoid the fund from falling further in value and investors losing out, Woodford stopped investors from removing their money.
News has now come that Woodford will soon be ‘winding down’ his fund – meaning that he will begin the process of selling off the investments, returning investors’ money and closing his fund for good. We explore some of the learnings we can take from what’s happened with Woodford Equity Income...
Active and passive investment – what does it all mean?
Neil Woodford is an active fund manager. Active managers use their own research, judgement and experience to make investment decisions on what assets to buy and sell. This differs from a passive investment.
A passive investment strategy, like ours, is one where investments are bought and sold to mimic something called a market index. An example of a market index is the ‘Financial Times Stock Exchange (FTSE) 100’.
The FTSE 100 tracks the top 100 companies with the highest share values publicly trading on the London Stock Exchange (LSE). The FTSE 100 represents roughly 80% of the value of all the companies on the LSE!
A passive fund could track which companies fall within the FTSE 100 and buy and sell the stocks of those companies.
There are lots of assumptions made about active management bringing in higher returns for investors than passive, but research has shown that more often than not, active management does not outperform passive management. The charges however are certainly higher and this difference in fees can mean thousands of pounds over the life of your investment.
As an active manager like Woodford enjoys early successes, the media can fuel their growing ego - often heralding them as having some kind of stock-picking superpower! But, just as easily as this media hype builds, it can quickly fall apart.
Active managers will naturally experience losses in their investment funds, much as any investment goes up and down in the short term – they can’t get it right all the time. When this happens for any extended period, the industry and media will pounce, and the sentiment can begin to turn on these managers, picking at their reputation. The media will then find someone else to build up as the new Woodford.
When you invest in an actively managed fund, you should be fully aware that you’re trusting these managers and relying on their experience and research to look after your money. You need to understand the risks associated with active management so you can make a sound decision that you feel comfortable with – don’t fall for the hype around active managers.
Diversification
No matter whether you’re invested in active or passive funds or a mixture of both, you should always make sure your investments are diversified. This means investing across funds in different markets and industries so you can spread your risk across all your investments – think of the old phrase ‘don’t put all of your eggs in one basket’.
If you’re making your own investment decisions and choosing your own funds, you should always make sure you diversify. If you get advice, your adviser should diversify your investments for you.
While it’ll be a worrying time for those invested in Woodford’s fund, hopefully they’ll have diversified portfolios and will be invested in a selection of other funds which have performed better, off-setting any loss.
Get advice
If you’re not sure, the best way to make sure you’re making the right decisions with your money is to get honest financial advice. As an online advice company, we talk a lot about the importance of asking an expert what the best thing for your money is.
It’s also really important to know the difference between ‘best buy’ tables and regulated financial advice. Lists and tables in articles online, telling people which investment funds are ‘the best’ can be dangerous. People may not fully understand the investment decisions they’re making when they follow these tables and have no protection if these decisions are wrong for them.
We really hope that what’s happened doesn’t put investors off completely. There are ways you can manage the risk you take with your investments and feel comfortable and confident even if you’re not a seasoned investor – diversify your investments, keep costs low, understand where you’re investing and, above all, get advice from a person or company regulated by the Financial Conduct Authority (FCA).
