We all love a good story. In the investment world, the story of the fund manager who can outwit the stock market is as an oldie but a goodie. However, we don’t tend to use stock picking fund managers in our client portfolio’s, but why not?
There is evidence to suggest that stock picking strategies are more based on luck than judgement and can be costly to access. Over a 20 year period ending in December 2018, only 23% of funds in the US have outperformed their index. About half of the funds didn’t even survive the period!
John Bogle did a study of funds between 1970 and 2005. In 1970 there were 335 mutual funds in the US. Of those funds, only 132 survived till 2005. Of those, only 9 exhibited statistically valid skills. Of those 9, 6 had high out performance in the early years with patchy performance thereafter. This leaves 3 (less than 1%) that showed consistent skill. This is the equivalent of looking for a needle in a hay stack!
Unfortunately, the recent plight of Neil Woodford has brought this into sharp focus.
For those of you who are unfamiliar, Neil Woodford is one of the UK’s most famous fund managers. He ran money at Invesco Perpetual and was famous for making big bets that delivered outperformance during difficult times.
He launched his own fund company 5 years ago to much fanfare. He was immediately endorsed by big names such as Hargreaves Lansdown.
However, he has recently had to suspend dealing in his equity income fund. This means investors cannot now access the money they hold in this fund. In the run up to this suspension, the fund had a bad run of performance.
However, as late as last month, Neil was still being publicly endorsed by Hargreaves Lansdown and had a place on their Wealth 50 list (a list of funds their analysts favour). In fact, Neil was also mandated to run several high funds for other high profile advice firms. He wasn’t removed from the Wealth 50 or sacked from these mandates until the suspension of redemption’s from his flagship fund.
Essentially, they have all suffered the under performance and none of them changed the message about their faith in Neil Woodford until the fund closed to redemption’s. The mandates are slightly different in that these aren’t part of the fund that has closed. However, none of those investment committees have provided protection and guidance against the under performance (and these are BIG companies who pride themselves on their ability to pick great fund managers).
At this point, it’s important to note…
We don’t hold Neil Woodford’s funds in any of our client portfolios (and never have)
I won’t go into the reasons for this horrible situation as it’s easy to kick someone after the event, but it does provide a very important lesson. If you are going to invest, don’t do so via a best buy list or ‘hot’ tip in a newspaper.
None of these people or organisations are on your side. They could be being paid to promote funds, gain revenue from you putting money into these funds or just be misled.
If you want to invest for your future, get professional, independent advice that has your values, priorities and goals at the heart of the process. Incidentally, if you are still adamant that you want to invest in a ‘hot’ stock picker, make sure it’s an amount you are comfortable losing completely; do not hang your future on it. Remember, past performance is no guide to future performance!
On a final note, I hope Neil Woodford recovers and re-opens the fund soon for the sake of those who have money invested with him and his team.
If you would like to talk about the above or your financial planning in general, please do get in contact.