Spooked by the Woodford saga? How to MOT your DIY portfolio
The closure of the once ‘star’ manager’s flagship fund has left thousands of clients unable to access their cash, but it will have also spooked the countless other people who have money invested in one of the 3,000 plus funds available to Britain’s DIY investors.
If you’re one of these investors, the message from the wider investment community has been – unsurprisingly – not to panic. Sound advice as panicking rarely achieves much.
But there are several steps you can take to help you sleep better at night.
Check your portfolio is diversified
Never has the old-adage “don’t put all your eggs in one basket” rung more true. Since Woodford shut the doors, there have been reports of people cancelling holidays and putting home renovations on hold because they have all their savings tied up in the fund.
This situation can be avoided by spreading your investments across a number of managers.
But don’t just diversify by fund manager. Check your money is invested across a variety of different geographies, asset classes, and styles.
Jason Hollands, of wealth manager Tilney, recommends reviewing your portfolio at least twice a year: “Even a well-balanced portfolio will drift over time as the various holdings will grow at different rates.
“This can mean that an initially moderate risk portfolio might mutate into a very risky one, if left untended. It’s necessary to periodically rebalance your asset allocation.”
Check how each fund is performing
You may have bought a fund years ago because it was run by a ‘star’ manager or it was delivering stellar returns.
But as Hollands explains: “Yesterday’s ‘star funds’ can crash out of orbit, successful managers change jobs or retire and a lot of fund managers simply don’t add value.”
It’s worth checking up on how your fund is performing relative to its benchmark and the competition, but Hollands recommends delving deeper and making sure the same manager is still in place and checking whether the portfolio is still doing what attracted you to it in the first place.
Hollands says: “Fund fact sheets available from the management company website, as well as analysis provided by many platforms, will typically show just the top ten holdings, but – more usefully – there will be a breakdown of how the fund is invested across different sectors and industries, and how the fund is spread across different company sizes.
“A red flag could be seeing a manager who has traditionally invested in large and medium sized companies, increasingly holding sizeable exposure to smaller companies or the manager straying into parts of the market where their track record isn’t clear.”
Don’t ignore liquidity
Woodford was forced to shut his fund after a stampede of investors requested their money back following a long period of underperformance.
The fund, which at its peak held £10bn of assets, experienced outflows of roughly £9m every working day in May.
The problem was a large chunk of the fund was invested in illiquid assets – investments which are not easy to sell – which made it difficult for the manager to meet these withdrawal requests.
Woodford closed the fund to give him time to sell these illiquid investments (to meet the increased demand to withdraw money).
Tom Stevenson, investment director for personal investing at Fidelity International, says: “Woodford’s willingness to invest in more obscure, less-liquid and sometimes unquoted holdings would not be a problem if the fund had met investors’ expectations and flows in and out of the fund had been within manageable bounds.”
As the Woodford scenario has shown, liquidity should not be underestimated.
Stevenson says: “The best way for a DIY investor to check liquidity is to understand what holdings are in the fund, as different classes have different levels of liquidity, and if you wanted a fund with high levels of liquidity it would be best to look for funds with holdings in large listed caps.”
Check you are in the right vehicle
The suspension of Woodford Equity Income highlights the importance for investors of understanding the difference between an open-ended fund and a closed-ended fund (or investment trust or investment company).
Annabel Brodie-Smith, of the Association of Investment Companies (AIC), explains: “A closed-ended structure is particularly suitable for investing in assets which are hard to buy and sell like unquoted shares. This is because managers do not have to worry about money coming into or leaving the fund as investment companies have a fixed number of shares which are bought and sold on a stock exchange.
“In contrast, open-ended funds don’t work well for illiquid assets. The fund manager has to manage the portfolio to accommodate inflows and outflows, ensuring they have enough money available to give investors their money back.
“When the chips are down open-ended fund managers can’t sell the illiquid assets quickly enough to meet investor redemptions.”
If you invest in illiquid assets such like property and unquoted shares, it may be worth considering a closed-ended fund.
Decide whether DIY is for you
If the events of the past few weeks have caused you a lot of worry, it’s worth considering whether the DIY investing route is best for you.
Michael Martin, of Seven Investment Management (7IM), says: “DIY investing when markets are going up every year can be relatively easy but when things get more volatile, it can become much harder, and as recent events have shown the cost of getting things wrong can be very painful.
“If you’re ever unsure about what to do and where to invest then it pays to seek professional financial advice.”