Investing post Woodford and lessons to be learned

Investing post Woodford will inevitably mean investors - and fund managers - will look to lessons that can be learned from the experience they either encountered or narrowly missed. Patrick Connolly offers some of those lessons.

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Patrick Connollly: The challenge is to make sure mistakes you make don’t have a significant impact on your overall investment portfolio.

Investing post Woodford could become a reference point for the investment industry from here on. As the dust if not the press coverage settles over the announcement by the administrator of the winding up of the Woodford Equity Income Fund (WEIF), lessons are, hopefully, being learned as to how investors can avoid being caught by falling funds and/or fund managers.

Investors have little choice or control over Link Fund Solutions – as the Authorised Corporate Director of the fund being ‘responsible for the orderly winding-up of the fund’ as the Financial Conduct Authority’s (FCA) update on the WEIF situation. The FCA confirms that BlackRock Advisors will help sell the fund’s assets and PJT Partners as a specialist broker will assist the firm in selling the WEIF’s less easily sold assets.

While all of this goes on Patrick Connolly, Chartered Financial Planner at Chase de Vere, has highlighted the following lessons that investors should learn from the Woodford fallout:

  • Don’t believe the hype about ‘star’ fund managers;
  • Be wary of companies that are trying to sell to you;
  • Make sure you’re properly diversified, and
  • Take independent financial advice.

Don’t believe the hype about ‘star’ fund managers

‘The investment industry places far too much focus on so-called star fund managers, Connolly writes. ‘This is done solely to entice investors to part with their money, as they then hope that the manager will provide them with superior investment returns.

‘The reality though, is that there have been very genuine star fund managers and many of those purported as stars have long since disappeared into the ether.

‘Those who are persuaded to invest with a ‘star’ fund manager could have unrealistic expectations of future performance and, worse than this, if they truly believe that their manager is a star, they could invest too much money with them, increasing the overall risks they are taking.

Connolly points out that in recent times, other than Woodford, the most obvious example of a ‘star’ fund manager was Anthony Bolton at Fidelity. ‘When Bolton launched a Chinese investment trust in 2010 there was lots of hype leading to £460m being invested, even though he had little or no experience of managing money in China,’ he writes.

Be wary of companies that are trying to sell to you

Execution only brokers and investment platforms often provide fund recommendations for their customers, Connolly writes. ‘This is done solely to entice customers and to encourage them to invest in the recommended funds on their platforms.

‘It’s important to realise that fund recommendations aren’t tailored to individual customers, there is absolutely no guarantee that they will perform well and the company making them takes no responsibility if they perform badly, it is their customer who loses out.’

Connolly points out that; ‘While Hargreaves Lansdown has got most of the flak for supporting Woodford, there were other execution-only brokers and product providers that were more than happy to piggyback on this publicity by sending out mailshots and emails, writing articles on their websites, producing videos and recommending Woodford in the financial press as they fought for their slice of the Woodford cake.’

Make sure you’re properly diversified

Connolly points that All investors will make mistakes. ‘All will, at some point, invest in sectors, funds or individual stocks which perform poorly’, he writes. ‘The challenge is to make sure that the mistakes you make don’t have a significant impact on your overall investment portfolio and on achieving your financial goals.’

The best way to do this is to spread risks he advises. ‘This means investing into a wide range of funds so that you aren’t overly reliant on a particular investment sector, company or fund manager.

‘If you currently hold 5% of your portfolio with Woodford, that will be a nuisance but won’t significantly impact on your overall portfolio. However, if you hold 25% of your portfolio with him, you will undoubtedly be really concerned by developments and will have already suffered from significant losses.

‘If you have a diversified portfolio then any bad decisions you make shouldn’t have a big impact on your overall finances and will hopefully be countered by good decisions that you have made elsewhere. It all goes back to the old adage of having your eggs in different baskets.

Take independent financial advice

Finally, Connolly advises that if you’re not sure what you’re doing with your investments, where you should be investing or how much risk you are taking then you should look to take independent financial advice.

‘Most people rely on their investments, whether that’s in their pensions or ISAs, to support them either now or in the future,’ he explains, ‘Therefore, the decisions they make with their investments are too important to get wrong.

‘It was no surprise to see that, from when Woodford launched his Equity Income fund in 2014, he was the most popular fund manager across most of the investment platforms for a sustained period. There will undoubtedly be investors who have suffered because they made their own decisions and invested too much money with Woodford.’

Further reading: Woodford fund to be wound up so investors can be repaid

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