This month saw Icarus finally hit the ocean as Neil Woodford closed his Equity Income fund to redemptions, in the process locking his clients’ money (£3.7bn worth) in for an indeterminate amount of time regardless of their circumstances. Many personal finance journalists, platforms, advisers and fund managers have suddenly developed amnesia and rushed to critical comment.
Whenever you read a negative comment, google the author’s name and Woodford’s to see how recently they were lauding him as one of the most successful active fund managers of his generation. The hypocrisy is startling, but the criticism is justified given the money he has lost for his investors since leaving Invesco to run his own fund. His performance (-18.5% over 3 years to the end of May 2019) currently has him bottom (91st out of 91) of the UK Equity Income sector that this fund is in.
The fall out has been huge so far with two of the largest players in financial services, Hargreaves Lansdowne HL and St James Place, getting dragged into the issue as continued big backers of Neil as a fund manager despite several well publicised issues. Hargreaves alone hold nearly half of the fund and their CEO has recently opted (temporarily?) not to take his £2m bonus as a result. The regulator the Financial Conduct Authority have now launched an investigation into the fund to see if any of their rules were broken.
Many supporters of active fund management (fund floggers such as HL) will tell investors that the issues were caused by a manager who was for many years one of the best (whilst at Invesco) buying shares in sectors he didn’t understand. There is truth in this as, what should have been a fairly standard open-ended equity income fund, invested in a large amount of unlisted companies and had to bend the rules to avoid a breach of regulations. This included swapping unlisted equities with the Patient Capital investment trust that he also runs and listing some of the small companies he partly owns on the Guernsey stockmarket.
Despite all of this there is also likely an element of mean reversion at play here. We explored Mean Reversion on the blog in the past using the example of Bill Miller who was a famous US fund manager who outperformed before coming crashing down (mean reverting) and we mentioned Neil Woodford at the time as someone who had performed equally well in the past.
If mean reversion holds true in active management then given long enough every one of the current active fund manager heros such as Nick Train (who recently predicted that he would mean revert in the future) or Terry Smith will return poor performance and start to look a little more mortal. If this is true, then the solution is surely not to pay these stars but to invest passively. The only exception to this might be if you also want to invest for a social good, to achieve a specific tax break or to provide some diversification away from shares and bonds but you should be careful not to pay much for any of these three benefits.