Many column inches have already been devoted to the Neil Woodford saga, but make no mistake, it is vitally important for investors to take some lessons from the downfall of ‘the greatest investor of his generation’.
- Being a contrarian is always a fine line, but it is not enough to be right three years too late.
- Open-ended funds are a bad structure for illiquid assets.
- It should finally put the concept of a ‘star manager’ to rest.
In today’s Financial Times, Merry Somerset-Webb gave the devastating conclusion: “What sticks in the throats most about this sorry saga of creep, arrogance and ego. Someone’s made a huge pile of money since 2014. You were told it could be you. It’s actually been Neil Woodford.” Certainly, at the time of writing, Woodford had not dropped the fees on the funds - unlike Hargreaves Lansdown - and that leaves an uncomfortable taste.
Aside from this, could Woodford reasonably be defined as a ‘victim’? It is clear that even the best investor in the world will struggle when the market is going against them. Being a contrarian is always a fine line. Perhaps the market would have come round to Woodford’s way of thinking, but - no matter how many people reference Tony Dye or the tech bubble - it is not enough to be right three years too late. Yes, everyone else may be terribly stupid, paying far too much for their growth stocks, but you need to stay humble to the market and recognise that your investors won’t wait forever.
It is also worth saying - again - that open-ended funds are a rubbish structure for illiquid assets. The type of problems we’ve seen at Woodford are rare, but they happen. When you have taken loads of money in short order, based on reputation rather than proof of concept, you should be alert to the fickle nature of clients. If that reputation wanes, you’re in trouble and you should have been prepared for it. Woodford hasn’t often had to contend with falling assets during his career and maybe that was the problem.
Woodford’s team has been quick to dismiss the idea that the analyst, compliance, risk or trading functions at Invesco Perpetual were better than he has at Woodford. The team at Woodford were ‘hand-picked’. In which case, how have these problems happened?
It should finally put the concept of a ‘star manager’ to rest. Yes, there are good fund managers, but often the magic is created by a specific team or environment that will not be replicated elsewhere no matter how many star analysts you take with you.
There are real problems for the advisory groups that supported Woodford. Why are highly-paid fund selection teams only now suspending ratings or moving mandates? Any effective due diligence process should have called these problems some time ago and protected client assets. There are plenty of other excellent UK equity income fund managers - why weren’t assets moving?
This is a difficult time for Woodford, but also a difficult time for the industry. It should prompt some self-reflection.