For well over a decade, Neil Woodford was considered one of the finest investment managers in the City. His funds were owned by a broad mix of clientele. This ranged from retail investors like you and I to larger institutional pension funds. His buy-and-hold approach, with a focus on trying to spot potential in companies, mirrors a lot of the Foolish values we have. Yet a year on from his shock demise, what investing lessons can we learn?
What happened?
In short, Woodford had bought-into a lot of unlisted companies within the Woodford LF Equity Income Fund. Firms that are unlisted mean you can’t go to the stock exchange and buy/sell the stock easily. Now, buying stock of unlisted firms is not illegal, of course, but the size of the holdings was quite high. When investors decided to sell out of the fund, he struggled to pay back the cash, as a lot was tied up in these unlisted firms.Â
This led to Woodford halting redemption of money from the fund, meaning you couldn’t sell out of it. With the news now in the public domain, the issue snowballed to such an extent that the fund was wound up, with Woodford fired. However, given that the fund was forced to sell stocks that are unlisted and hard to shift, this meant realising large losses.Â
Investing lessons learned
I’ve owned a Woodford fund in the past, although was not caught up in the above. The fund itself performed well, so much so that I considered investing more into it. For the Equity Income fund, some piled all of their savings into it, or a large proportion.
But regardless of how tempting it might be, I would always say that investors like us should try to resist putting all of our money into one investment. Even if it is a diversified fund that owns many stocks, you still aren’t diversified as you have all the risk of owning just one fund. So I’d always recommend splitting your investments up over multiple stocks, or indeed multiple mutual funds.
Secondly, do your research into where a fund can itself invest. Or if it’s a specific stock, look at the financial statements. Woodford was allowed to invest in risky unlisted stocks. That meant the fund would always have an element of being unable to sell some stocks quickly if needed. Investors could have known that from the fund information. With a stock, you can see such things as the cash on hand, the debt size, and other important information. It always pays to read the finer print so that you’re aware of what you’re investing in.
Finally, with investing, we can’t win all of the time. For every stock that has performed well, I’ve another story of a stock I bought that lost me money. In investing, you’ll never be right 100% of the time. But with a diversified investment portfolio held for the long term, even with some losses you’ll still be able to be in profit overall.