‘ANGER AT FALL OF THE HOUSE OF WOODFORD’ – This was the title of a long article in FT Money on the weekend of 19th October 2019.
When something goes wrong, we all thrash around to cast blame: does the fault lie with the Regulator, the Fund Administrator, Hargreaves Lansdown, Woodford himself?
The one person who is usually omitted from this list of wrong doers is the investor themselves. Please do not get me wrong, I am not saying it is the investors fault for investing in this fund and suffering a financial loss – I sympathise, particularly because I think part of the problem has been caused by a lack of understanding by the average investor. My real fear is that the result of this crisis will be a long-standing aversion by the ‘person in the street’ to investing in the market. They will say ‘I will keep my money in cash… look at what happened to those people who invested with Woodford’.
Let me enlarge on my point. The problem is that many people do not understand the difference between gambling: defined in the Oxford Dictionary as: Take risky action in the hope of a desired result.
And investing, defined in the Oxford Dictionary of English as: Put (money) into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit
When we go to the race course or dog track we place a bet, this is usually a small amount of money which we can afford to lose because we know there is a high probability of loss. This gives us a moment of elation or disappointment and then we move on.
When we have spare income or capital to invest the situation is completely different, we are looking to provide ourselves with a more secure future, we cannot afford to lose money, so the approach should be different.
Hargreaves Lansdown have understandably come in for a large amount of censure by their customers and rightly so, they should not have kept Woodford on the ‘Buy List’ for so long. However, there is a deeper problem which few commentators seem to be highlighting and that is a lack of understanding by the public. Hargreaves Lansdown offer a Platform on which clients can deal and they offer a list of ‘good buys’ rather in the way that the bookie on the race course offers the list of horses in the race. Hargreaves Lansdown are not saying you should invest all your money or even a high percentage of your money in any particular fund and they are not saying that the fund is ‘suitable’ for your needs.
There are two important points here:
1. Should the investor invest a high proportion of his/her money in one fund, the answer is a categoric ‘no’ – investors should have their money spread across different asset classes: cash, fixed interest, equities, both UK and overseas and commercial property and within each asset class you need a spread between small and large Cap companies. Was this being achieved in the Woodford fund? ‘No’, this was an equity fund investing primarily in small or very, very small cap companies
2. Was the fund suitable for the investor’s needs? I would question whether the investors understood the level of risk in this fund. The fund information sheet highlights the level of risk, but the true understanding can only really be achieved by an explanation from a professional.
This leads me to the purpose of this article; my hope is that this crisis can lead the consumer to understand that ‘doing it yourself’ can lead to large mistakes.
Taking advice costs money but it can be well spent because an adviser should invest your money in a portfolio of well spread assets which are regularly reviewed. The regular review is of vital importance. When you first invest in a fund, it may be well constructed for the current economic situation, but interest rates, inflation and political risk will change and the performance of the fund will be affected. At Nicholls Stevens we review all the funds we use on a monthly basis and take action accordingly, the majority of our clients moved out of the Woodford Equity Income fund in Spring 2018.
Taking advice costs money but it also enables a professional to assess your attitude to risk. Your investments will then be made in such a way that you can sleep soundly at night. You will not get ‘the big win’ but there will be funds available when you need them, planning your investment future with a professional is what will give you long term security.
I am of the opinion that some investors use direct Platforms such as Hargreaves Lansdown because they believe advice is only open to those with £1m+ to invest, that is simply not the situation. At Nicholls Stevens by using collective funds we can construct well diversified and risk related portfolios for clients with modest amounts to invest.