October wasn’t a great month for fund managers (the people who make the investment decisions that dictate how well your savings and investments perform). There have been two very high profile resignations—one as a result of a Sunday Times investigation, the other from a Panorama exposé. Unsurprisingly, clients have been asking us questions, so we decided to write this short article outlining what has happened.

The downfall of Neil Woodford

There can’t be many people who haven’t heard of Neil Woodford. He began his career with Reed Pension Fund and TSB and then, aged just 27, became a fund manager with Eagle Star. In 1988, he moved to Invesco Perpetual where he really made his name. Woodford ran their Income and High Income funds, with combined assets approaching £25bn.

He gained a reputation as one of the UK’s leading—if not the leading—fund managers, famously avoiding the worst of the dot com bubble in the 90s and the 2008 financial crisis.

In 2014, he left Invesco Perpetual to form Woodford Investment Management, running both an equity income fund and a listed investment trust. But in March 2019, the Sunday Times launched an investigation following two years of poor performance that had seen fund assets fall by more than £5bn.

The investigation found that Woodford’s flagship fund held less than 20% of its assets in FTSE 100 companies, compared to more than 50% when it was formed. More than 20% of the assets were in much riskier Alternative Investment Market companies. The Equity Income fund was suspended in early June, following the inevitable withdrawals by investors subsequent to the Times’ investigation.

St James’s Place Wealth Management terminated Woodford’s contract to run three of its funds—with assets of £3.5bn—and the Financial Conduct Authority launched a formal investigation. On October 15th the company announced that the Equity Income fund would close, and on the following day Neil Woodford announced that he would resign from his remaining investment funds and ‘close the company in an orderly fashion.’

Meanwhile, at Capital Group…

This time it was an investigation by the BBC Panorama programme rather than a newspaper, but the end result was the same.

Mark Denning was one of Capital Group’s leading fund managers: he’d been with the company for 36 years and helped to manage some £229bn of assets. The allegations from the BBC programme—screened on October 21st—were simple: Denning had used a fund based in Liechtenstein to buy shares in companies his funds had backed.

Despite denying any wrongdoing, he swiftly resigned, with Capital Group equally quick to release a statement: We have a Code of Ethics and personal disclosure requirements that hold our associates to the highest standards of conduct. When we learned of this matter we took immediate action.

Patently, investment fund managers are not supposed to invest in the same companies as their funds, as they could potentially profit at the expense of investors. Given the Panorama investigation, neither Capital Group nor Mark Denning had any choice as to what to do.

Our thoughts

It has been said that Neil Woodford’s spectacular downfall was caused by a lack of scrutiny. At Invesco Perpetual, wrote the BBC, ‘he was challenged on his investment decisions.’ The inference was clear—when it was his own name over the door, there was not the same degree of scrutiny.

Some commentators have suggested that the Woodford saga could spell the death of the star fund manager. The fact that a high profile manager such as Woodford can flop illustrates that stock picking is not easy. Many academic studies have shown that choosing a fund manager that will outperform the market is incredibly difficult. The number of fund managers that can successfully pick stocks are fewer than you’d expect by chance. As a result, our focus is on actions that add value and lead to a better investment experience:

1. Create an investment plan to fit your needs and risk tolerance
(Investments carry risk and should fit your overall attitude to investment risk)

2. Don’t try to outguess the market
(As the saying goes, it’s time in the market, not market timing)

3. Resist chasing past performance
(It’s not a reliable indicator of future performance)

4. Diversify globally
(Holding securities across many market segments can help manage overall risk)

5. Minimise investment charges
(Costs can detract from investment returns)

6. Stay disciplined through market ups and downs
(Reacting to current market conditions may lead to making poor investment decisions)

For more information, do get in touch, we’d love to hear from you. You can call us on 01789 263888 or email hello@charterswealth.co.uk.

The value of your investment (and any income from it) can go down as well as up and you may not get back the full amount you invested.