It is high time to ramp up our standards of financial education as we survey the wreckage of Woodford Equity Income fund and the public’s panicky response.
I have been a huge fan of Neil Woodford since learning of his actions on his first full day as manager of the Edinburgh (EDIN) investment trust, which he ran for six years after its board sacked Fidelity and appointed the then Invesco Perpetual, where Woodford had established a great reputation on its income funds.
The date: Monday 15 September 2008. Lehman Bros had collapsed over the weekend, pushing the credit crunch into overdrive. Few recognised how quickly and dramatically liquidity in the stock market would dry up.
Woodford came into his office at Invesco and, barely taking time to hang up his coat, ordered the immediate sale of every banking and insurance share in the trust’s portfolio. You can imagine him picking up a coffee and calmly watching the drama play out and the flashing screens turn to red.
When Edinburgh’s board of directors learned of the move, they had kittens. But it worked. As the dust settled over the coming months, Woodford had not just saved the trust and its shareholders tens of millions of pounds but, unlike many of his peers, had cash to pick up bargains as they arose. I’d say that was one of the gutsiest moves in fund management history.
Fast forward today and the Northern Rock-like wave of panic selling of Woodford’s Equity Income fund. The whole ghastly saga tells me one thing above all. Despite efforts by bodies such as the Association of Investment Companies – and of its former director general, Daniel Godfrey, in particular – the level of financial education in this country is lamentable.
People, by which I mean ordinary investors, have no understanding of how so-called ‘open-ended’ investment companies (Oeics or ‘Oiks’ for short) such as Woodford’s work. If large numbers want out, as is the case now, the fund has to sell enough of its own portfolio holdings, very likely at poor prices, to pay investors back. When millions of pounds are involved, that can’t happen overnight, which is why the fund has been placed in temporary suspension.
The whole thing is a ghastly self-fulfilling prophecy of doom and financial loss, reminiscent of past UK panic-buying debacles that led to outages of sugar, petrol, Delia Smith’s cranberries and even, as we speak, apparently, of stocks for Brexit food hoards.
Returning to the world of managed funds, had this selling wave hit a large investment trust, as opposed to an Oeic, those who wanted could still sell their shares. They would have received a depressed price, yes – but, crucially, the fund manager would not have been forced to sell a single share to pay them back.
The reason: an investment trust as a ‘closed-end’ fund is effectively a wrapper of the overall portfolio. The price of that wrapper will rise and fall with supply and demand but the contents of the wrapper remain unchanged. In other words, whether people sell or not, the investment portfolio itself is not forced into fire-sale mode.
Two last thoughts about the Woodford fund. First, its investment portfolio was constructed with immense care by one of the all-time greats. I stand by that view. While its performance to date has been poor, there is no credible outcome, bar an epidemic of panic selling, that involves a substantial and permanent collapse in underlying values.
Secondly, how much better might the Woodford flagship fund have fared, if its fortunes and its unlisted holdings had been overseen before and since its launch by a long-experienced and questioning independent board of directors, as the best investment trusts would have?
My conclusion is that it is time for trade bodies, the regulators, the press and even the government to ramp up our standards of financial education. It’s not hard to guess what my investment vehicle of choice would be placed at the heart of its curriculum.
John Newlands is the founder of Newlands Fund Research.