How to avoid the next Woodford
History doesn’t repeat itself, but it often rhymes.
Mark Twain is often credited with this pearl of wisdom, but he didn’t say it!
Before the collapse of Woodford’s fund, history was rhyming away like Pam Ayres.
There was a tech bubble inflating and the share prices of those boring old companies that Mr Woodford said he liked weren’t doing as well as the likes of Facebook and Uber.
At the turn of the Century, however, brave Neil stuck to his guns, the tech bubble collapsed, boring companies came back into favour, and the legend of Woodford was born. We had our very own Warren Buffett!
Now, had Mr Woodford stuck to his boring old dividend-paying UK companies this time around, he might have underperformed, which would have been disappointing, but not disastrous.
There’s been plenty written about why the fund had to shut the exit door, and I’m not going to give you another version of the same story. I’d instead think about how you might avoid the next Woodford.
Martin made the right decision not to recommend Woodford’s funds (and was smart enough to write down his thoughts see here), and I reached the same conclusion independently (but didn’t write it down publicly!).
So, if you want to avoid investing in the next Woodford, I’d suggest you do the following:
• Invest in a fund with a clear investment objective and mandate. The fund objective should make it clear what the manager is trying to achieve; funds with woolly objectives are best avoided.
The fund mandate will tell what sort of investments can be included in the fund; again, if this isn’t clear, it’s probably best to avoid the fund.
It’s not good enough to know what Investment Association sector the fund is in – you have to understand what the manager intends to invest in too.
Woodford’s funds were always in the UK Equity Income sector, but his mandates have allowed him to invest in companies outside of the UK – even back in his Invesco Perpetual days. If the fund objective or mandate is clear, then don’t invest. Simple!
• Invest in a fund which doesn’t rely on the ability, or presence of one individual.
There are plenty of funds around that are managed by a team or rely on a defined investment process, or which are run by a computer (like an index tracker).
If you do want to follow the manager, make sure that he is investing in the same things as he used to. Woodford was good at picking dividend-paying companies which were underpriced; he wasn’t very good at picking smaller, growth companies.
Anthony Bolton made the same mistake in China, and Terry Smith did the same with emerging markets.
• Avoid funds which have exposure to illiquid assets. You have a choice here.
If you want a properly diversified portfolio, you may have to accept some exposure to illiquid assets. Assets like property are naturally illiquid.
And some things that are liquid today may become illiquid tomorrow (e.g. corporate bonds or emerging market bonds).
In extreme times, even cash can become illiquid (remember the queues outside Northern Rock?).
• Monitor the fund. Check if anything changes and keep an eye on the holdings in the fund.
Listen to independent, reputable fund reviewers– but not those who have some interest in promoting the fund (or minimising redemptions from it).
If you follow those steps, I can’t guarantee you’ll avoid the next Woodford. But you’ll have improved your chances of doing so hugely.
And what if you don’t have time to do these things?
Either accept that you could be in the next Woodford fund, or get someone to help you avoid it!