Neil Woodford’s fall from grace has been dramatic. Just five years ago, the forthright fund manager set up Woodford Investment Management after leaving Invesco to slaps on the back all round.
Now, some of his closest allies in the industry are keen to distance themselves. St James’s Place and Omnis have fired him from running their funds, and Hargreaves Lansdown has pulled £45million of its clients’ money from his Income Focus Fund.
The sorry saga should be a warning to savers who have simply ploughed their money into a well-known manager’s fund, without looking too deeply and without diversifying to spread their risks.
If you spread your savings around different managers then you will not lose everything if one goes bad
That even goes for other big names out there. Alongside Neil Woodford, Britain’s best-known fund managers are probably Terry Smith of Fundsmith and Nick Train of Lindsell Train.
Can investors be sure they won’t also turn out to have feet of clay?
The answer, sadly, is no. Any manager, however well they have done in the past, can go through a bad patch or even crash and burn. Fortunately, there are some simple protective measures.
First, research the fund and the manager’s strategy. If you are not comfortable or don’t understand, steer clear. And never put all your eggs in one basket.
If you spread your savings around different managers then you will not lose everything if one goes bad. And be sceptical – never just invest because someone is lauded.
One of the problems with Woodford was that, arguably, his flagship Equity Income did not do what it said on the tin.
Normally, an equity income fund would have holdings mainly in large quoted companies.
But Woodford had invested a large chunk of savers’ money in unquoted companies, which aren’t listed on a stock market, and so don’t have shares that can be easily traded.
He had also bought huge stakes in relatively small firms – he owns 47 per cent of mattress company Eve Sleep, for example.
This makes them difficult to sell, as he would have to find a buyer for his massive stake.
Woodford might say he had explained to investors through his blogs and videos that he was taking more of an interest in unquoted and smaller stocks. But not all investors may have realised this.
Ryan Hughes, head of active portfolios at AJ Bell, says: ‘Woodford was pretty up-front about what the plan was for the Equity Income Fund.
‘The bigger issue was that people bought the name above the door, not what was underneath the bonnet.’
The lesson for investors is to check if a fund is actually doing what you think – don’t assume.
So what of other big names?
Terry Smith’s Fundsmith Equity Fund has a big following. It launched in 2010 and has turned a £1,000 investment into £4,520. Nick Train’s Lindsell Train Investment Trust has turned £1,000 into £20,500 since 2001.
But a stellar track record does not mean a manager is immune to losses. Train this week said that ‘it would not at all be a surprise if [our] portfolio that had performed well embarked on a period of poor performance’.
At Invesco, Woodford was lauded for his golden touch. His strategy before he left was to concentrate on large companies, where he had 75 per cent of his fund, and dabble in smaller, riskier companies.
That changed dramatically. Fast-forward six years, and only 4 per cent of Woodford Equity Income is in those large and mega-cap firms. The lesson for investors is to keep an eye on what the manager is actually doing.
Those like Smith and Train are loved for their reliability. They have methods they stick to – and it should be easy to spot when they deviate.
‘Smith has a big document on his website that explains how he thinks and invests. Before anyone invests they should read it,’ says Hughes.
‘He will exclude sectors – airlines, financials, biotech, loads of little miners – so it’s easy to spot if he’s doing something he said he wouldn’t.’
Train likes high-quality stocks which generate large amounts of cash, pay a growing stream of dividends and show potential to adapt to a changing market.
If he started putting money in risky start-ups, red lights should start flashing.
There are other, lesser-known fund managers, says Hughes. ‘Francis Brooke at Troy Trojan Income is a star manager, in terms of how he operates and the way he really sticks to his principles of investing in defensive businesses that generate cash flow,’ he says.
James Anderson at Baillie Gifford’s Scottish Mortgage Investment Trust is another. But most of all, Hughes recommends engaging with fund managers. ‘I would always urge investors to ask them questions,’ he says.
Popular Shares – Saga
It has been a pretty gloomy run for retirement firm Saga and its army of 180,000 retail investors.
Floated for £2.1billion in 2014, it has failed to wow investors and is now worth just £414million.
Shares have tanked from a launch price of 185p to 36.93p – a brutal 80 per cent drop.
Chief executive Lance Batchelor paid the price and is stepping down in January.
But look behind the terrible headlines and the £391million debt pile and there could be a good business here.
Saga’s over-50s market is made up of affluent people, and it is launching a new membership scheme.
Next month it takes delivery of a new cruise ship, along with a second vessel in 2020.
Cruising is expected to grow by 22.5 per cent over the next five years according to data firm Mintel, much faster than the overall holiday market.
In insurance, Saga has introduced a pioneering policy where prices stay the same for three years, meaning loyal customers are not ripped off.
As the firm has said, there will be a short, sharp hit to profits but in the long run it could be a popular driver of business.
So with shares now so low and new blood poised to take charge, this could just be the right time to buy in.