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Woodford has put me off active funds. How can I protect myself?

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18/11/2019
A host of industry experts reveal how investors can reduce the risk of being caught up in a Woodford-style saga.

The downfall of the UK’s best-known fund manager, Neil Woodford, has been terrible for the reputation of the investment industry.

It’s given investors another reason – on top of Brexit, political uncertainty and general concerns around the state of the economy – to pull their money out of funds.

And that’s exactly what they’ve done. The latest figures from the Investment Association, the trade body representing fund groups, shows private investors withdrew record amounts from equity funds in September.

A total of £2.3bn was withdrawn from UK equity income products alone in the three months to September, marking the worst quarter for sales of these funds in history.

While the Woodford scandal isn’t the only reason behind dismal fund sales, it has no doubt been a contributing factor.

Woodford is as close to a household name as you could find in the fund world so it’s no surprise his dramatic demise, which has seen hundreds and thousands of clients barred from their money, has rattled investors.

Highly unusual situation

But investment experts stress the saga is highly unusual.

“The problems with the Woodford fund were high profile, but it’s important to remember that he is just one fund manager and it’s the only example of such a large fund being suspended and then liquidated in recent history,” says Laura Suter, personal finance analyst at investment platform AJ Bell.

Jason Hollands, managing director of broker Tilney, adds: “The Woodford Equity Income fund faced a perfect storm of terrible performance, an unusual and questionable strategy of including exposure to private companies not listed on the markets in the portfolio and massive outflows from investors.”

There are also suggestions his ‘star’ manager status contributed to his downfall.

“He may have let his reputation and the compliments go to his head and therefore didn’t listen to others as much.  Fund managers need to walk that fine line between confidence and arrogance,” says Adrian Lowcock, head of personal investing at platform Willis Owen.

That’s not to say another Woodford situation is out of the question. But there are plenty of ways to reduce the risk, according to our experts.

Diversify

The first thing, they say, is spread your money across several fund managers.

“This experience has taught us that even the best managers can lose their way. So just as it is important to be diversified across different stock markets and companies, it is also important to be diversified across different fund managers and their investment styles,” says Lowcock.

Peter Sleep, senior investment manager at 7IM, suggests buying a spread of UCITs funds.

“UCITs funds are designed for smaller investors and have a number of protections like keeping the fund manager separate from the bank accounts,” he says.

“Try to pick a fund covered by the Financial Services Compensation Scheme.”

Next, make sure you regularly monitor your funds.

“Outsourcing investment decisions to a fund manager isn’t an entirely hands-off option,” says Suter.

Investors should watch out for any signs that the manager is changing their approach.

“This was the crux of the issue with Woodford,” says Hollands.

“He made his name as a successful investor in large and medium-sized listed, dividend generating, companies and had an approach that was mindful of the price he paid for shares. However, increasingly he grew interested in small, early stage companies that often paid no dividends, a drift in approach that gathered pace when he set up on his own. This ultimately led to his downfall.”

It’s fairly easy to keep an eye on your manager. Every fund produces a regular fact sheet, which can be found online. It gives a short summary of what the fund invests in, its current largest holdings, the charges and recent performance.

Many fund managers also publish monthly updates, detailing how the fund has performed that month, which holdings have outperformed and those that have failed to deliver.

Your platform should also produce updates on what the fund is doing and how it’s performing.

Sleep says: “Pick a few random investments that you’ve never heard of and Google them and see if the investments are consistent with the objectives of the fund.”

Importantly, contact your fund manager directly if you have any questions.

Keep some money aside

Finally, keep some money in a bank or building society account for short term needs.

Although this isn’t completely risk free – don’t forget the collapse of Northern Rock during the financial crisis – savings of up to £85,000 per bank are protected in the event of a collapse.

However, our experts suggest money you know you won’t need for at least five years and that you’re prepared to take some risk with is better off being invested.

Suter says: “The current interest rates on offer on cash accounts are pretty dismal, and once you’ve taken into account inflation, which is how much prices are rising by, you’re likely to face a loss in real terms.”

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