There has been a lot of press recently about the failure of the funds managed by star fund manager Neil Woodford and the impact this has had on investors. I thought it was therefore appropriate to make some comment on this, and also to reaffirm our process around buying funds and why we place great emphasis on having good liquidity (the ability to sell quickly) in our portfolios.
Firstly, it’s important to mention that we never held any of the Woodford funds. We were concerned about how Neil Woodford would get on having left Invesco to set up his own shop. Initially his performance was good, however, after a while, it began to tail off. As he took more money in, he ended up buying unquoted assets (characteristically difficult to sell) and when the redemptions from the fund came, he had no choice but to shut the fund and not allow investors to sell. As this unravelled over the past few months, it has ultimately led to the collapse of his funds and a significant fall in asset value which are now being dripped back to investors, at significant loss. We are pleased that we did not follow the trend and invest client money in his new fund. As a part of our process on fund selection, we very rarely follow fund managers when they move, but rather wait to see how they get on first.
We place a great deal of importance on liquidity within portfolios. One of our investment principles is to select investments that allow clients to access their money whenever they need it. Therefore, all of the funds we purchase trade on a daily basis and are not invested in assets that are difficult to sell such as Property and unlisted companies.
You may have noticed that we have not invested in Property. In 2016, following the Brexit vote, property funds shut their doors when investors tried to sell them and didn’t open them for several months. This was not the first time and you can never be sure when this might happen again. Their assets are bricks and mortar, therefore difficult to sell at short notice. If there are lots of investors wanting to sell at the same time it is impossible for them to sell enough assets quickly and return them to investors. The illiquid nature of this sector is the reason why we have avoided and continue to avoid it.
As a reminder, our Investment Process is detailed below.
The initial aim of our investment process is to achieve a set of risk-adjusted model portfolios.
Our process can be broken down into five stages as follows:
- Formulate our views on the world. We conduct extensive research in order to formulate our thoughts on the global economy and the trends that are prevailing. This involves engaging with the major fund groups as well as conducting over 200 fund manager meetings a year.
- Create our own asset allocation. Our macroeconomic analysis leads us deciding how much exposure we want to the different asset classes, which are broadly equities, bonds and alternatives.
- Decide which part of each asset class we want. Taking equities as an example, we drill down further to decide which countries, sectors and styles we favour.
- Find the best fund managers. Once we complete the first three steps, the ultimate aim is to create a portfolio of funds that reflects our thoughts. A significant amount of time is spent finding the best fund managers in the specific areas we wish to invest in. We always meet the shortlisted managers to look them in the eye and gain conviction in their investment approach. If we cannot identify a suitable fund manager, we will consider an ETF instead.
- Ongoing Monitoring. The final portfolios are constantly monitored to ensure they perform as we expect. We also keep abreast of other competing funds to make sure we maintain the best of breed in our portfolios and regularly catch up with the managers we have invested in.
These steps give us the conviction to do what we are doing, to have confidence in our client portfolios and to continue to be innovative in launching new portfolios and initiatives.
If you would like to chat about processes or investment principles in greater depth, please do not hesitate to contact me.
Head of Investments