Where does your fund manager invest?
PUBLISHED: 14:19 18 October 2019 | UPDATED: 14:19 18 October 2019
Fund managers rarely seek fame, but you should examine where they invest, says financial columnist Peter Sharkey.
City fund managers tend not to be high-profile types chased by paparazzi when emerging from a trendy Mayfair club at 3am in the company of two procedurally-enhanced blondes. In fact, considering the average fund manager starts work before 7am, there's a strong probability he or she will be tucked up in bed well before midnight.
Fame is for footballers, actors, models, game show hosts, not fund managers, despite their comparative wealth and ability to successfully invest on behalf of millions of others.
Occasionally, however, a fund manager performs so well, his or her returns are so good, their reputation so revered, that investors flock to them like bees to honey.
Neil Woodford became one such manager: not famous, just very, very good. His long-term investment performance while employed at City fund managers Invesco Perpetual could only be described as stellar.
Had you invested £1,000 with Mr Woodford at the start of his Invesco Perpetual career, it would have been worth £25,000 by the time he left to establish his own business 26 years later. Lots of folks did just that: by April 2014, when Mr Woodford decided to plough his own furrow, he was directly responsible for the management of almost £24 billion worth of investments.
Not surprisingly, once Woodford Investment Management LLP opened its front doors a year later, thousands of investors and billions of pounds flowed into the company's coffers with the express intention of it being overseen by Mr Woodford. This huge injection of cash was driven primarily by Mr Woodford's reputation as an outstanding manager of other people's money.
For several years, the good times continued to roll and investors fortunate enough to follow Mr Woodford from Invesco Perpetual, or invest based upon is star-studded reputation, enjoyed returns which some years exceeded 20%.
In March, however, as investment returns began to slow, the Sunday Times undertook an 'investigation' into where Mr Woodford's funds and investment trusts were actually invested.
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Where once Mr Woodford's large-scale funds would invest primarily in colossal FTSE100 companies, the Sunday Times found that the percentage of his client's money invested in these blue-chip organisations had fallen below 20%. The newspaper claimed that more than a fifth was invested in the junior, riskier, Alternative Investment Market (AIM), while large sums had been invested in a variety of even smaller firms, ie private companies with no stock market listing.
There's nothing inherently wrong in investing in private, unquoted firms, or AIM, or outside of the FTSE 100, far from it, but for all his brilliance, perhaps Mr Woodford underestimated his clients' appetite for risk.
Once it became apparent that one of his most popular funds owned much riskier assets than many investors preferred, the rate at which withdrawals were made from the fund began to accelerate. By June, such was the outward flow of cash that investors were prevented from withdrawing money from the Woodford Equity Income Fund. In many respects, this marked the beginning of the end for Mr Woodford's operations. On Tuesday, he was sacked from his role as manager of the flagship fund by administrators charged with winding it up and returning all assets to investors. The following day he announced that the last two remaining funds operating under the Woodford Investment Management umbrella would be wound down in "an orderly fashion".
Is this a tale of hubris, over-ambition, or plain bad luck? Mr Woodford was certainly unlucky as several of his investments turned unexpectedly sour, but can we blame him for wanting to run his own show after a quarter century as a paid employee?
From an investor's perspective, however, the picture looks a little different.
Investing with a high-profile manager who runs a limited number of funds can prove enormously successful, as anyone who has invested with Terry Smith's Fundsmith over the past decade would confirm.
But cautious investors would maintain that the collapse of Neil Woodford's operation highlights the good sense in spreading risk. Though a single fund manager can experience difficulties, it's unlikely that eight or ten of them will do so at the same time. Which is where investing with a manager who runs a variety of portfolios specifically suited to cautious, balanced, or adventurous investors, for instance, makes enormous sense.
A portfolio will likely consist of half a dozen different funds with similar aims (caution, balance, adventure etc), which can make the selection process much easier for most investors. By contrast, putting all of your eggs in one basket, even when the person managing those eggs enjoys a stellar reputation, can prove riskier than you may first imagine.
TAM Asset Management Ltd offer savers the opportunity to invest in Investment ISA portfolios comprising a variety of different funds pursuing cautious, balanced or adventurous strategies. For further details, please visit the MoneyMapp website.
For more financial advice, check out Peter Sharkey's regular column, The Week In Numbers.