When the news broke on 3 June about the decision to suspend trading on the Woodford Equity Income fund my first thoughts were not only for those invested, but also the damage this could have on the industry in general with regards to trust.
The aftermath of the news has seen talk about the mistakes that have led to this position. The failings surrounding liquidity and the so-called hubris of the most well-known stock picker in the UK.
Let’s be clear, mistakes have been made. The decision to invest in unquoted companies was clearly a mistake in hindsight – with poor performance forcing the manager to sell some of his holdings and, as a result, seeing that exposure to unquoted and less-liquid stocks increase. Some of the actions that have spun out of that decision have clearly come back to haunt Woodford Investment Management.
I also think the decision not to waive fees – despite calls from many to do so – has not done the asset manager any favours.
Liquidity is an age-old problem
Liquidity is an issue that is nothing new for active management. We’ve seen problems with liquidity within daily-traded vehicles before in the shape of property funds, although this is clearly a big step beyond that given this is a mainstream UK fund.
Last weekend I read an article in the Financial Times from Andrew Bailey indicating the Financial Conduct Authority would look in more detail at the impact of daily withdrawals from funds holding hard-to-trade assets as well as the ability of investors to choose the jurisdiction they invest in. This is all nice to know but the fact is this is (potentially) coming from a retrospective angle once again and will not be to any benefit of those investing in the fund. This is an issue which, if managed correctly, could have turned out far better for investors. I’ve also seen ex-minister Lord Myners has criticised the regulator for not spotting the warning signs.
Don’t equate Woodford’s big mistake with wider active management
There has also been much made of this being the latest nail in the coffin of active management – something I wholeheartedly disagree with. No one can deny the growth of passive funds, but there remain scores of active managers running funds in the UK who have phenomenal outperformance over the long term (more than 10 years) and have done an amazing job for investors. I see this as a big mistake by a manager, rather than a failing of active management on the whole, and it should be conveyed as such.
Yes, Neil has performed badly in the past two years for a number of reasons. Firstly his style of investing has been out of favour: he holds many unloved and undervalued companies, which are domestically focused. But as Brexit drags on, they have not been given the opportunity to recover. There have also been a number of stock-specific issues, where individual companies he has invested in have suffered sharp share price falls. Usually, good active managers more than make up for these types of mistakes, especially when the markets suit their style and, crucially, they produce the outperformance over a full market cycle. To me it’s the liquidity issue which should draw the concern in this case.
My views on active have not changed and I believe that active managers will continue – as many have done in the past – to take advantage of valuation anomalies and market dislocations. We’ve seen what volatility can do in 2018 and good active managers will always have the advantage of backing the winners and avoiding the losers – and with more volatility and market disruptors around the corner I expect that to continue.