For those in the know, Neil Woodford was considered financial royalty. He was one of the most famous investment managers in the country, after ten years of stellar performance as the manager of the Invesco Perpetual Income Fund. A £10,000 investment made at the start of his tenure would have turned into £114,000 within 20 years (Dan Hyde, This is Money, 12 October 2012).
Five years ago he decided to quit Invesco and set up his own fund, a move that was heralded as a masterstroke in the financial press (Brian Milligan, BBC, 19 June 2015). Alas, Woodford has struggled over the years to deliver anywhere close to the same performance as his Invesco fund. His flagship fund has performed so poorly that investors have been pulling out money at the rate of £10m a day for nearly 23 months (Rupert Neate, the Guardian, 8 June 2019).
The collapse of Woodford’s investment career is unfortunate, but it highlights the many risks and uncertainties all investors, professional or otherwise, face. Here are the three lessons retail investors can take away from this noteworthy debacle:
1. Past performance is no indicator of future success
Although mutual funds and investment products are always marketed with this statutory warning, it’s worth reiterating. Investing is an unpredictable endeavour and even the best and brightest cannot say what the future holds.
Retail investors should accept the fact that no one is going to perfectly time every investment and pick the best stocks on a consistent basis, so mitigating downside risks through diversification and careful planning is more important than setting expectations based on past performance.
2. Focus on the portfolio, not the manager
The reputation of star managers and well-known financial brands can often be misleading. Experience and credibility are worth seeking out, but these factors shouldn’t be the cornerstone of your investment strategy. Instead, focus on asset classes, correlations, and sectors while constructing a portfolio of mutual funds.
3. Consider passive investing
Woodford’s fate highlights just how difficult it can be to outperform the market on a consistent basis. In fact, even investment legend Warren Buffett’s portfolio at Berkshire Hathaway has struggled to outperform his benchmark S&P 500 index over the past 11 years (Arjun Reddy, Business Insider, April 26, 2019). Hedge funds have underperformed the S&P 500 over the same decade as well (Nir Kaissar, Bloomberg, February 19, 2019).
Considering these surprising statistics, investors may want to take another look at passive investing through low-cost index funds.
The value of investments and income from them may go down as well as up and you may not get back the original amount invested.