Five Powerful Lessons From The Woodford Fund Suspension

Five Powerful Lessons From The Woodford Fund Suspension

The market can stay irrational longer than you can stay solvent
— John Maynard Keynes

If there’s one thing you can be sure of, it’s that the financial world will regularly pop up in the news. Sadly, it’s all too often for all of the wrong reasons and remind us why a lot of the public view those of us working in the financial industry with a degree of distrust.

Take the recent coverage of once superstar fund manager Neil Woodford. In case you’ve somehow missed it, Neil Woodford was once widely celebrated and enjoyed a stellar reputation for his high performing funds that were paying out great returns for investors.

However, with one of his key funds, the Woodford Equity Income Fund performing poorly, investors quickly began to withdraw their cash. At it’s height, the fund had £10.2bn invested in it this has now shrunk to about £3.7bn..As withdrawals hit up to £10m per day, Woodford decided to block investor from pulling out their cash, leading to a huge uproar.

While the key takeaways from the whole incident has been comments about hubris, star fund managers and the understandable distrust of the financial industry, I’m going to take a huge leap of faith and say that there are some great lessons that ALL of us can learn. They lessons have been set out below:

Lesson #1 – Always diversify your investments - Basically spread your eggs across different baskets

Yep they’re experienced, yep they are generally intelligent, yep they have insight that you might not have, but no fund manager has a crystal ball. Instead what the best of managers do is use their experience, education and research skills to build a fund that will help add value to your investment over the long term.

So while you can trust them with your investment, try to spread any investments across a few fund managers.

For example, Kent Council one of the investors that “triggered” a suspension of the Woodford fund was aiming to withdraw it’s entire investment with the fund which was £263m at end of April 2019 . Sounds like a lot right? Yep, until you realise that this only makes up 4% of Kent council’s investment portfolio. So just like Kent Council did, ensure you diversify your investments and not just rely on Neil Woodford’s fund.

Lesson #2 – Opportunities do sometimes arise from crisis

What?! How can there be an opportunity from such a debacle? Well, at a minimum there will be pressure on Woodford to reduce the fee he charges on his fund which will be beneficial for those still invested.

Secondly, we are told experience is the best teacher. Woodford has had a stellar career for over two decades and that wealth of experience isn’t just snuffed out in a matter of weeks. The lessons he’s learnt from these series of events coupled with past wealth of experience means he comes back stronger. However, if you still plan to invest in his funds in future, don’t forget Lesson #1 in a hurry.

Lesson #3 – Try to have a bit of cash buffer before you venture into investing - Emergency Fund

One of the aspects of Woodford’s fund that investors found attractive was that it paid out high income. The fund does this by investing in companies that payout a lot of their profit as dividend/income. This is then passed on to you as an investor as frequent income to supplement your salary/pension etc. With the suspension of the fund, the frequency of payout of income is obvioulsy affected. Which is why it’s always important to have an emergency cash buffer regardless of the type of funds or investment you are exposed.

Lesson #4 – Always try to read past tabloid headlines that are designed to sensationalise events such as suspension of the Woodford Fund

Understandably the first reaction from investors is a loss of faith in a manager that won’t let them take their money out! However, the decision to suspend the fund wasn’t taken ligtly. This action was taken to protect investors in the fund. The fund buys stocks and shares in companies and some of these shares are not easily traded (illiquid) when an investor wants their money especially if the investor wants a significant amount of money from the fund. Such situation may force the fund manager to sell these stocks at a huge discount and has negative impact on remaining investors. Gating or suspending the fund gives the manager time to sell down assets in an orderly manner and return money to investors.

Lesson #5 – Track and relax

Woodford’s Equity Income Fund is actively managed. Actively managed funds aim to beat the performance of the market (the market being the performance of all stocks and shares that can be bought and sold).

I personally believe that some actively managed funds do beat the market over the long term but investors will require a lot of skill to be able to pick the winners.

Not many of us have that skills and expertise to pick out these winners so most end up investing in tracker funds (funds that aim to perform in line with the market). These tracker funds are also called index funds and the main providers of these funds include Vanguard, Legal & General, BlackRock and a lot more.

Brinking it all together

From time to time there are events in the finance and investing world that tend to call to question the whole concept of investing and definitely brings to fore the risks involved. However, I hope the lessons above do give you some comfort. More importantly, investing is a long term game which will have bumps and surprises on the way but for most, the final outcome is usally positive and empowering if you stick to the simple and basic principles of investing.

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