Neil Woodford quits his funds: what does this mean for investors?
It is one of the biggest crises to hit the UK’s financial sector in recent years. But what went wrong for Neil Woodford and what should his investors know about it?
He was one of the UK’s best-known – and most revered – money managers. But now, Neil Woodford’s reputation lies in tatters, with investors licking their wounds following the closure of his flagship, eponymous equity income fund.
The crisis at his investment empire, which at its peak was managing in excess of £10bn, began in June. Investors had started to ask for their money back following a string of bad acquisitions made on their behalf – and it reached the point where withdrawals had to be frozen.
Thousands of British consumers have been forced to watch helplessly as prices tumbled by almost 20 per cent in the months since then. And, to add insult to serious injury, fees worth millions of pounds have continued to be charged despite the suspension.
For a sizeable number of investors, the consequences are severe. Some say they are now unable to retire because of the impact that the crisis has had on their nest eggs. What’s more, it’s likely that those affected will not be able to recoup what’s left until the middle of January.
But what should Neil Woodford’s investors do now and, indeed, are there any lessons to learn going forward?
What went wrong?
A major factor in the suspension of withdrawals lay in how Woodford’s funds heavily relied on illiquid investments, meaning they could not be converted into cash quickly enough to meet demand from investors. Naturally, such positions are going to be riskier — and it seems that many of the fund’s customers weren’t aware of this.
He was trusted because of his performance while a fund manager at Invesco Perpetual. In 2013, he was riding high after a 25-year career at the firm — overseeing an income fund that had risen 2,192 per cent in value since it launched in 1998. To put that into context, that’s comfortably more than twice the gains that an investor would have realised from the FTSE All Share Index over the same space of time.
When Woodford decided to fly solo, hundreds of millions of pounds followed him because of his reputation. But, as the old adage goes, past performance is not an indication of what is going to happen in the future. It’s fair to say that the complications surrounding the Brexit vote, not to mention the ensuing negotiations, have not been kind to UK stocks anyway. Star stock-pickers are only as good as their last investment and, just like the rest of us, they’re bound to have bad days.
Lessons to learn
Ultimately, for the investors who have been burned by the closure of the Woodford Equity Income Fund, it’s sadly a classic lesson: be careful not to put all your eggs in one basket. Diversification is crucial to ensure that portfolios can weather the storm of such unexpected events — and having a blend of low and high-risk holdings is nothing short of essential, especially in these turbulent times.
Investors also need to make sure they have a firm grasp of what they are actually putting their money into — and this due diligence needs to happen before funds are committed, rather than afterwards.
There’s no getting away from the fact that this is a catastrophe for the financial services sector and it’s likely to have a devastating impact on consumer confidence in investing. That said, affected investors should think twice before they contemplate avoiding the stock markets for ever. With interest rates remaining stubbornly low, the returns on conventional savings accounts are paltry — and premium bonds are unlikely to deliver the growth that people need when planning for the future.