One of the more peculiar aspects of the financial sector is a fund manager’s ability to lose billions of pounds for thousands of clients and return to the public eye five years later, in blog form.
In case you missed it, Neil Woodford has made a return to economic commentary, describing himself as 'neither hero nor villain'. This was just days after the FCA issued a warning notice against Woodford himself, saying he had a “defective and unreasonably narrow” understanding of his responsibilities for managing his fund, which was suspended in 2019.
It's worth remembering, however, that many fund selectors held Woodford Equity Income. So half a decade onwards from the collapse of his eponymous fund, Asset Allocator thought it would be worthwhile to conduct a deep dive into his legacy upon the world of fund selection.
What we’ve learnt from chats with several DFMs is that the overriding lesson for allocators is as simple and as complex as this: know what you’re buying. While our readers may argue that this has always been the case, the case of Woodford proved that it’s of utmost importance for allocators to understand the underlying components of every fund into which they invest client money.
What else have we learnt then, folks?
Solid liquidity
Bevan Blair, chief investment officer of One Four Nine Group, told us two things were reinforced to him in the aftermath of the saga.
First, that liquidity is a lesson often only learnt in hindsight.
“As an industry we need to focus more on liquidity as a risk to portfolios as currently we tend to think about it too late,” he said. “It seems easy to ignore underlying liquidity when a fund is in net subscription mode, but it becomes all-important when a fund turns to net redemptions, especially if these are prolonged. All too often portfolio managers can offer the illusion of liquidity - but if the underlying itself is illiquid then you are holding an illiquid asset regardless of the structure you think you are in.”
Second, he said that DFMs should think ‘very carefully’ about even small changes to a manager's objectives and style. Even a small style change could cause a big impact on how the manager goes about executing investment decisions, he added.
This is a view shared by Ben Mackie, senior fund manager at Hawksmoor, who said they’re very keen to avoid style drifts whenever possible.
“We like managers if they've got that experience and resilience to stick to their guns through a period of difficult performance,” he said.
“We don't buy a manager to try and outperform all of the time. The best process and philosophies will guarantee underperformance at certain points in time, but what we want is them to stick to their process and not flip-flop or change their style, or try and generate relative performance.”
Boutiques aren’t always the bad guys
Perhaps Woodford’s legacy may – in part at least – have been to make it a harder world for boutiques as allocators are unwilling to get burnt again, according to Simon-Evan Cook of Downing.
“Everyone seems to have taken exactly the wrong lesson from the Woodford debacle,” he said. “They seem to have gone against boutiques and against small funds. Well, it wasn't a small fund. It was a ten billion pound fund at peak and it was a ten billion pound fund that invested in illiquid unlisted stocks.”
He added that big funds are arguably more prone to redemption issues than smaller ones, citing Liontrust International Equity as a smaller mandate that they exited last year with minimal noise and no money lost.
His penchant for boutiques remains undeterred post-Woodford, as Asset Allocator has covered recently.
Going back to the topic of liquidity, Evan-Cook added that Downing stays entirely out of investment trusts for exactly this reason.
Stop searching for the golden goose
Woodford’s legacy, of course, has done precisely zero favours for the active management industry and, at its most extreme, such mistrust could cause DFMs to favour passive funds.
“There's loads of Neil Woodford in the graveyard,” said Craig Burgess, chief executive officer of EBI.
“You've only got to go dig them up and see that this is something that's happened time and time again.”
“For a lot of advisers, they all had a slug of it in the portfolio. But if you have a market-like portfolio, then the only thing you've got to explain to your clients is market risk. You don't have to worry about growth, fund managers and performance.”
Burgess acknowledged that passive funds have to give up performance somewhere but that this approach takes all the extra worry – and cost – of more complex fund selection.
“They don't add any real value and you've always got those tails, where you might just have the next Neil in there by mistake,” he added. “All because your portfolio manager hung in with Neil and paid the price. And then what's the credibility you've got?”
