Is the Neil Woodford debacle another nail in the coffin for active investing?

If you read the financial press, this is huge news. On 4th June 2019, ‘Star fund manager’, Neil Woodford, stopped investors withdrawing money out of his flagship Woodford Equity Income Fund. This was brought about by a run on the fund, which saw investors withdraw a whopping £560m in May alone. Kent County Council wanted to withdraw a further £263m, but was unable to do so before trading ceased.

Neil Woodford was once the darling fund manager who could do no wrong. Only a few years ago he was riding on the crest of a wave when he left his employer, Invesco Perpetual, to start his own asset management business, Woodford Investment Management Limited. With a reputation for having the golden touch, he’d built an enormous following among institutional and retail investors alike, many of whom followed him to his new company.

As an active fund manager, Neil Woodford uses his instinct, know-how and experience to buy and sell stocks that potentially outperform, and aims to provide investors with favorable returns. The challenge with this comes on a number of levels and no one is going to get it right all of the time.

Because active investing includes the costs of buying and selling stocks, as well as paying fund managers and research teams, these expenses can have a detrimental impact on the overall return that can be achieved.

Investors have been debating the merits of “active” versus “passive” investing for some time now. There are some very good fund managers who have a proven track record of outperforming the benchmark and delivering consistent returns. However, yesterday’s winners might be tomorrow’s losers!

The move to passive investing

The idea behind passive investing is that markets are generally efficient. Trying to time the markets by actively selecting when to buy and sell or picking individual stocks that will outperform, is at best difficult to achieve, and at worst a foolish game.

At Charters Private Wealth, we follow an evidence-based approach to investing consistent with principles supported by various academic studies. A 2016 study by S&P Dow Jones Indices showed that about 90 per cent of active stock managers failed to beat their index targets. In addition, studies have shown that if an active manager outperforms the market over a 12 month period, they are less likely to do so over the following year. It doesn’t paint a very positive picture.

Ultimately, we believe that it’s difficult to beat the market, so the focus is to track the performance of various investment indices as efficiently as possible. We want to avoid the high fees and performance risks that occur with frequent trading, with the aim of delivering investment returns over time in line with various risk profiles. Included within our portfolios are best of breed index funds from the world’s leading passive asset managers including Dimensional, Vanguard, Legal & General and BlackRock. These funds provide broad market exposure at low cost.

Passive funds are not new—they were introduced in the 1970s, seen as an easier way to achieve returns in line with the market. Skip over 40 years later to 2015, and the amount of money invested in computer run index trackers in the UK broke through the £100bn mark for the first time. There is currently a significant shift towards passive investing and away from active and Mr Woodford is only demonstrating why that’s the case.

Always remember, the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be regarded as a long-term strategy and should fit in with your overall attitude to risk and financial circumstances.

If you’ve any questions about our approach to investing money, please feel free to get in touch with us directly on 01789 263888 or email