It is very unusual for a story about an investment fund closing its doors to redemptions making the headlines on the BBC News at Six.
Having watched the news or read about it in the press, I am sure that many investors would have been worried about what this may mean for their own investments. I am, of course, talking about the stories around Neil Woodford and the closing of his multi-billion investment fund to withdrawals, possibly until Christmas.
A highly unusual event
The first thing to say is that this is a highly unusual event and is very rare in the fund management industry.
Suspending future withdrawals was a result of the sheer number of redemption requests and due to the particular assets held by the fund itself.
Whilst extremely difficult for the investors concerned, the fund manager would argue that the suspension enables him to meet withdrawal requests in an orderly fashion and to prevent a ‘fire sale’ of assets. This means that, ultimately, a fair price is received for the assets when eventually sold.
Why we’ve never recommended Neil Woodford’s funds
The second thing to say (without smugness) is that BlueSKY has never recommended Neil Woodford’s funds. Whilst the long-term track record of Neil Woodford is very strong, choosing ‘star’ fund managers is not one of the criteria in our investment selection process.
Unlike many advisers and investors that jumped on the bandwagon when Mr Woodford left Invesco Perpetual to launch his own investment boutique, we maintained that we would not consider his new fund unless it met our strict criteria – which it never has.
The simple reason for not choosing investments based on the past performance of a ‘star’ manager is that there is no academic evidence to suggest a star fund manager’s ‘outperformance’ will persist in the long term.
Personally, I think that there are organisations who acted as a cheerleader for Mr Woodford, who should share some responsibility for the problems caused by pushing his fund in their ‘best buy’ lists – even when it was clear for all to see that the fund was struggling against its peers.
So, bringing it back to BlueSKY and our own investment process, I’m sure that many of you are wondering whether this could happen to you.
The simple truth is that we can’t guarantee that it wouldn’t. However, neither could any other adviser. So, the best we can do is to build (or use) investment propositions which make suspending redemptions highly unlikely.
Let me explain why….
At the heart of the BlueSKY investment proposition is the academically proven argument that the majority of long-term returns (over 90%) will be gained from holding the ‘right’ assets.
By this, we mean owning a very wide selection of the market as a whole. This differs to Mr Woodford, who holds a concentrated portfolio of companies, which he has taken a bet on.
We also believe that all our clients should invest in a global portfolio. The reality is that the UK makes up around 5% of the world economy. Think of all the great companies in the world that you wouldn’t own a share of if you just invested in the UK, as Mr Woodford does.
Additionally, holding the ‘right’ assets means not just investing in UK shares. It means investing across the whole range of assets available; bonds, shares, property and cash. Even then, these asset classes can be further sub-divided by investing in different areas of the world.
Diversification works because it enables us to build a portfolio that meets an individual’s willingness to take risk. This, in turn, dovetails with their long-term goals.
It works because it means that there is no over-concentration in any one asset class or area of the world. It works because different fund management groups manage the different asset classes. It works because the underlying funds have been selected on robust and impartial criteria and not simply because the fund manager is a ‘star’.
The lessons to learn
So, the lessons to be learned from Neil Woodford and his fall from grace are many.
Perhaps the key message can be summarised as: don’t put all your eggs in one basket and don’t let one person carry all the baskets.
In a word; diversify.