How I avoided the Neil Woodford Equity Income fund train wreck

Back in late 2014, I invested around £5,000 of my Self-Invested Personal Pension (SIPP) money in Neil Woodford’s Equity Income fund. At the time, I was very comfortable putting my retirement money into this fund as it was one of the best performers in its class and Woodford had a great long-term performance track record. 

However, as I explained in this article in February last year, I made the decision to bail out of Woodford’s fund and I reinvested the proceeds into a number of other equity funds. In hindsight, this was a very smart decision. Not only has Woodford’s flagship fund been suspended for over four months, but it was announced earlier this week has been sacked as the fund manager and that the fund will be wound up. Unfortunately, this means many will get back less than they invested.

Here, I’ll explain why I sold the fund last year and look at how other investors could have avoided the Woodford train wreck.

The fund changed dramatically

One of the main reasons I originally invested in Woodford’s fund was that it was marketed as an ‘equity income’ fund. This type of fund is designed to provide a mix of capital growth and income and generally tends to invest in large, stable, blue-chip companies. In this case, Woodford’s fund owned stocks such as HSBC Holdings, BAE Systems, British American Tobacco, and Reckitt Benckiser, so I was happy with how my money was invested.

However, over the next few years, the composition of the portfolio changed dramatically. Every time I glanced at a monthly report, it seemed that there was less focus on blue-chip stocks and more on speculative, early-stage companies. For example, at 31 December 2017, higher-risk companies such as Burford Capital, Purplebricks, and biotechnology company Prothena were all in the top 10 holdings (all three of these growth stocks have crashed since).

Now, this wasn’t what I signed up for. In my pension, I was looking to invest in established, dividend-paying companies that would provide a degree of stability, not volatile early-stage growth stocks. For this reason, I sold out of the fund. That has turned out to be a very good decision.

The takeaway

To my mind, the main takeaway here is that if you’re outsourcing the management of your money to someone else, it’s crucial to understand exactly what you’re investing in and monitor your investments on a regular basis to determine that they’re still suitable for your requirements.

I realised the Woodford fund was a disaster waiting to happen because I regularly looked at the monthly reports and examined the fund’s portfolio. It was no longer what I was looking for, so I dumped it.

There were plenty of warning signs the fund had issues. For example, I looked at it again in April this year, just a few months before the suspension, and said it was one to avoid because it was “quite risky.” Hopefully, that article saved a few Fool readers. 

Ultimately, the bottom line is that when investing your money, it’s essential to do your own research.