Last week’s well-reported move by Woodford Investment Management to suspend dealings in its Equity Income Fund means that those invested in the fund can’t get their money out and no-one can put any money in either.
Woodford needs time to get out of illiquid, unquoted underlying shareholdings that the fund has. And the reason is simple, investors in the Equity Income fund have been falling over themselves to pull their money out. And in order to service the demand from fund investors who want their money back, Woodford needs the holdings in the fund to be liquid.
Chronic underperformance
So the money in the fund is coming out of illiquid investments and into big, stock-market-listed firms. Perhaps Imperial Brands is a good example – it’s one of the fund’s largest holdings.
Investors seem to be pulling so much money from the fund because of its chronic under-performance in recent years. In hindsight, it’s clear that Woodford made a string of bad calls and many of the shares picked by the firm plunged.
I can potentially see two main things that went wrong. One is that the contrarian approach used for picking out-of-favour shares and cheap-looking cyclicals didn’t work very well. A second reason is that the firm strayed from the strategy and investing style that brought Neil Woodford success in the past and instead went for speculative stocks such as Purplebricks.
However, the outcome could also have arisen because of an element of luck. Equally, Neil Woodford’s previous outperformance could have been driven by an element of luck as well. But whichever way you look at it, all the funds managed by Woodford Investment Management have been performing poorly, including the firm’s foray into the world of speculation with the Woodford Patient Capital Trust (LSE: WPCT).
Here’s how you could do better
As investing outcomes go, pulling the shutters down on your investors and locking in their money while you scrabble around for liquidity is about as bad as it gets. I reckon the most we can hope for when the fund eventually reopens is that Woodford returns to the strategy of trading big-cap value that earned such a good reputation in the first place. But what’s the point in investing in a fund like that?
My guess is that the fund’s holdings in the future will be similar to a roll-call of many firms in the FTSE 350 index. But you don’t need an expensive fund manager to do that. I’d rather put my money in a low-cost, diversified index tracker fund. Why not? the bar has been set low by Woodford, so it’s easier to beat than ever with passive funds. Or you might consider running your own investment portfolio and picking individual shareholdings yourself.
The Woodford ‘magic’ is lost, in my view. So I’d move on because there’s more to successful investing than backing horses that have just proved their ability to lag behind.