If you read the financial press, this is big news. ‘Star fund manager’, Neil Woodford, stopped investors withdrawing money out of his Woodford Equity Income Fund on 4th June, after the sum total of investment withdrawn from the fund reached a staggering £560m in less than four weeks. Kent County Council wanted to withdraw a further £263m, but was unable to do so before trading halted.
Investment analysts have attributed this action to the significant poor performance of the fund over recent months. Neil Woodford was once the darling fund manager who could do no wrong. A few years ago he was riding high when he left his employer, Invesco Perpetual, to set up his own company, Woodford Funds. With a reputation for having the midas touch, he had built a large following amongst both retail and institutional investors, many of whom followed him to his new venture. Some investors are unable to withdraw their funds and are now nursing significant losses.
There are a number of issues at play here.
Don’t put all your eggs in one basket
Investing is about managing risk and diversification is a key part of this. Committing all your money to one investment manager is never a great idea. By selecting a range of funds, it is possible to spread the risk within portfolios.
Asset allocation is a key driver to performance
It is not just about selecting the right funds. When constructing portfolios, take into account the importance of asset allocation. This is the split between different types of investments such as UK and overseas equities, fixed interest and cash. Asset allocation is as important as fund selection.
Follow the fund, not the manager
Fund managers are human, they do not get it right all the time. The most sensible approach is to consider the fundamentals governing the fund itself, not the individual investment manager. Understand the answers to questions such as what process and approach does the fund take to manage risk and the stock selection process? What governance process and framework is in place to ensure a fund delivers against its stated objectives? Fund managers can be flavour of the month, however, it is the fundamentals of the fund itself that provide better insight.
12 June 2019
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