Investors in the Woodford Equity Income Fund learned this week that they’re going to be stuck with the fund for a while longer. It was gated (closed to investors withdrawing – or depositing – money) a little more than a month ago, as concerns over poor performance and breaches of rules on the level of illiquid assets the portfolio can hold threatened to turn into a run on the fund. Manager Neil Woodford updated the market this week – long story short, the fund is still shut.
Woodford’s plan is to sell his illiquid holdings and invest in more liquid (ie, easier to buy and sell) FTSE 100 and FTSE 250 stocks. He knows that his only hope of retaining any money at all in the fund when he reopens it is for investors to feel confident that it won’t be gated again, and also that he’s returning to the value-oriented, income-focused style that made his name. Given that his big success trade – long tobacco, avoid dotcoms – is now in the distant past, we’re not sure we’d give him the benefit of the doubt, and we suspect that lots of the investors still trapped in his fund, and still paying his fees, feel the same way.
The pity of it all is that, on paper, Woodford Investment Management offered many things we want to see from a “boutique” fund manager. For example, you could never mistake Woodford funds for “closet trackers” – this was truly active management (sure, his investors would have been better off in a tracker, but that’s another issue). So how can you avoid future Woodfords when you’re looking for a good active manager?
Invest with asset nurturers, not asset gatherers
One of the biggest warning flags was Woodford’s willingness to take as much money as the market would throw at him. Given his plan to invest in small stocks, it should have been clear that there would be a limit to the amount of money the fund could usefully deploy. Yet investors were buying the Woodford brand rather than his underlying thesis, and Woodford took full advantage.
Look for clarity of purpose
Despite Woodford’s vaunted transparency, there was one big problem with his equity income fund – it was a real stretch to call it an “income” fund. That’s before we even get to the confusing choice of unlisted assets. The best managers have a very clear investment strategy and are good at communicating it – whether you agree with them or not, the philosophy driving managers such as James Anderson at Scottish Mortgage or Nick Train at Lindsell Train is obvious. This matters – it helps you to spot “style drift”.
Use the right vehicle
If a manager plans to invest in illiquid assets, then they should be using a closed-ended vehicle like an investment trust. Don’t invest with someone who promises daily liquidity while snapping up hard-to-sell assets.