• Follow us

Economy

Troubles at the Woodford investment group point to a wider trend

THE STOCKMARKET is a risky and complicated place. For more than a century many investors have trusted financial experts to pick the best shares for them, in return for a hefty fee. But even the experts can get it badly wrong.

That has been the case this week with Woodford Investment Management, which has suffered two devastating blows. The first occurred when the firm suspended trading in its flagship Equity Income fund, locking in investors’ money. The second came when St James’s Place, a wealth management group, announced that it was replacing Woodford as the manager of some £3.5bn worth of assets. That move alone reduced the amount of money managed by Woodford by around 40%.

Get our daily newsletter

Upgrade your inbox and get our Daily Dispatch and Editor's Picks.

The Woodford crisis illustrates a much broader trend. Investors have steadily been realising that the experts can struggle to outperform the market. Instead they have been pouring money into funds that simply seek to mimic the market, but charge low fees. Assets in exchange-traded funds (ETFs) rose from $716bn in 2008 to almost $4.7trn at the end of last year, according to Statista, an information group. The two biggest fund management groups in the world, BlackRock and Vanguard, specialise in index-tracking or passive funds. Active funds (those that try to beat the market) have struggled to perform over periods from one to 10 years. The right-hand chart shows that only a tiny proportion of funds investing in UK equities (like the Woodford fund) have beaten the market over periods from one to 10 years.

During the long period when he was a fund manager at Invesco Perpetual, Neil Woodford seemed to be an exception to this rule. He picked unfashionable stocks in areas like tobacco and avoided the dotcom boom. His success prompted many clients to follow him when he set up his own firm in 2014. Woodford Investment Management was managing more than £10bn at its peak.

But this belief in “star” fund managers is not supported by the data. The left-hand chart shows the percentage of US managers in the top quartile (best performing 25%) of 2014 that repeated the feat in succeeding years. If the results were just random, then 25% of managers should repeat the feat in the first year, 6.25% in the second, 1.6% in the third and so on. As you can see, the figures are no better than random as time goes on. Picking managers on the basis of past performance is a mug’s game.

Why is that so? The most obvious reason is that outperformance over a short period is down to luck more than skill and that, over time, managers revert to the mean. Since fund managers own most of the market, their performance is, on average, likely to replicate the market, before costs. Those costs can be significant (often, more than a percentage point a year) so that the average manager is doomed to underperform, after those costs are taken into account.

Star managers will, by definition, have portfolios that do not look like the overall market. Often they will have made a limited number of bets on a small number of companies. As their reputation grows, money will flood in from new investors. For a while, they might try to invest in the same shares as before. But if they are not careful, they will end up owning 20-30% of such companies. So the temptation will be to spread the portfolio over a broader range of groups. The danger is that their 50th favourite stock might not be as good a bet as their top ten.

The resulting pattern can be strong performance in the early years, but a more mediocre result later on. The long-term return numbers can still look good. But most clients will have invested their money after the stellar years; the return earned by the average client will not be that great. A classic example of this phenomenon was Fidelity Magellan. When Peter Lynch took over the fund in 1977, it had just $22m in assets. He achieved a return of 29% a year on average until 1990, by which stage the fund had $14bn under management. Assets continued to pour in under his immediate successors and the fund reached more than $100bn, making it by far the biggest mutual fund in 2000. But the fund lagged the market for years afterwards; the latecomers (who invested the bulk of the money) lost out.

Mr Woodford tried to escape the rut by investing in smaller stocks, some of which were unquoted and some of which were listed on the tiny Guernsey exchange. This meant that his fund did not resemble the conventional market, and thus had the chance to outperform. But it created three problems. The first was that Mr Woodford was running an equity income fund, which meant that he needed to find companies that paid regular dividends; small, unquoted companies tend not to do this. The second problem was some of Mr Woodford’s bets went badly wrong: the fund has returned 11% since its launch, compared with the UK market’s 34%. The third problem was the greatest. Woodford Equity Income is an “open-ended” fund. When investors buy into the fund, its assets rise, and the manager must buy more shares; when they sell, the assets fall, and the manager must sell. There was thus a mismatch between Mr Woodford’s clients, who could demand instant liquidity, and his assets, a proportion of which was difficult to sell. Poor performance has been causing money to head out of the fund, with £560m flowing out in May, according to Morningstar, an investment research firm. When one big client, Kent County Council, demanded its money back, trading was suspended to give Woodford time to realise the money.

All of this was a big shock for Mr Woodford’s prominent backers, including Hargreaves Lansdown, a leading financial adviser. The Woodford fund was on its “Wealth 50” list of favourite funds. And Hargreaves also runs its own funds, one of which, the Multi-Manager Income & Growth Trust, had £405m (13.7% of its assets) in the Woodford fund. So it is not just the experts who can get it wrong; so can the experts who pick the experts.

For years, those arguing that UK investors should stick to passive tracking funds have faced the comeback “What about Neil Woodford?” They won’t get that comeback any more.

Correction (June 10th 2019): The figures on the probability of outperformance have been altered following an earlier editing error.

Read More



Leave A Comment

More News

BBC News - Business

'Pilots were not to blame for 737 crash' 2019-06-16 19:25:00The boss of Ethiopian Airlines has rejected the idea his pilots were at fault in 737 Max crash.

Brexit uncertainty 'hitting UK business investment' 2019-06-16 19:16:38Companies should be investing in measures aimed at growth, says the British Chambers of Commerce.

CEO Secrets: My clubs aren't 'pale, stale and 2019-06-16 19:06:43Entrepreneur Ronald Ndoro talks about his vision for private members' clubs in the 21st century.

Carole Ghosn: 'I'm a housewife, not a conniving 2019-06-16 19:02:06The wife of former Nissan chief Carlos Ghosn speaks out about his detention and campaign to free him.

Carole Ghosn calls for President Trump to back 2019-06-16 19:00:19The wife of the former Nissan boss Carlos Ghosn wants pressure put on Japan over his legal battle.

Argentina and Uruguay scramble to restore power after 2019-06-16 15:40:42Argentina's president promises a full investigation after a blackout left millions without electricity.

Tory leadership race: EU will renegotiate Brexit package, 2019-06-16 09:26:49Mr Hunt said if there is no prospect of a deal by 31 October he would accept a no-deal Brexit.

Babe Ruth jersey fetches record-breaking $5.64m at auction 2019-06-15 20:56:37The baseball legend's jersey becomes the most expensive piece of sports memorabilia ever sold.

Tattoos at work: Are they still an issue? 2019-06-15 19:58:56Employers have become more relaxed about visible tattoos at work, but some firms still don't allow them.

Illegal eel exporters exposed by Countryfile 2019-06-15 19:23:26International buyers offered high prices for eels caught on the River Severn in Gloucestershire.

'My parents wanted me to marry. I became 2019-06-15 19:10:43Photographer Sayan Hazra captures a day in the life of one of India's few female DJs.

India announces retaliatory trade tariffs against the US 2019-06-15 17:13:07The new duties come days before countries' leaders are expected to meet at a G20 summit in Japan.

Reuters: Business News

AT&T drops CBS channels from its cable systems 2019-07-20 04:21:13CBS Corp said on Saturday AT&T Inc has removed CBS's television stations from the channels of DIRECTV, DIRECTV NOW and AT&T U-verse TV cust

Carlos Ghosn sues Nissan-Mitsubishi in the Netherlands: paper 2019-07-20 04:10:35Carlos Ghosn has launched a court case in the Netherlands against Japanese carmakers Nissan Motor and Mitsubishi Motors , who ousted him as chairman

China Southern Airlines to receive $4 billion capital 2019-07-20 01:55:40China Southern Airlines will carry out an equity diversification plan that will involve the injection of 30 billion yuan ($4.36 billion) of capital f

American Airlines-Qantas joint venture wins final U.S. approval 2019-07-19 21:38:57The U.S. Department of Transportation (DOT) on Friday granted American Airlines Group Inc and Qantas Airways Ltd final approval to operate a joint ven

White House to host meeting with tech executives 2019-07-19 20:50:04White House economic adviser Larry Kudlow will host a meeting with semiconductor and software executives on Monday to discuss the U.S. ban on sales to

Equifax nears deal to pay about $700 million 2019-07-19 20:02:51Credit reporting company Equifax Inc is close to a deal to pay around $700 million to settle data breach probes with U.S. regulators and states, the

Ford to lay off around 200 workers at 2019-07-19 18:16:47Ford Motor Co will lay off about approximately 200 employees in September at a Canadian manufacturing plant in Oakville, Ontario, with the possibilit

Four Republican lawmakers ask Trump to move forward 2019-07-19 17:44:08Four Republican members of U.S. Congress, including House Armed Services Committee ranking member Mac Thornberry, sent a letter to President Donald Tr

Wall Street falls as Fed signals smaller rate 2019-07-19 17:34:24Wall Street's main indexes fell on Friday following a report that the Federal Reserve plans to cut interest rates by only a quarter-percentage point

Oil climbs as Middle East tensions offset demand 2019-07-19 16:55:01Oil prices rose about 1 percent on Friday after steep losses a day earlier, supported by rising tensions between the United States and Iran, even as c

Global stocks down as big rate cut hopes 2019-07-19 16:45:47A gauge of global stocks declined after early gains dissipated on Friday as expectations for a strongly dovish U.S. Federal Reserve at its next meetin

Trump: U.S. had 'very good talk' with China; 2019-07-19 16:38:26U.S. President Donald Trump said on Friday that U.S. Treasury Secretary Steve Mnuchin had a very good talk with his Chinese counterpart, amid signals

Business News - UPI.com

Pentagon: 2,100 more troops headed to U.S.-Mexico border 2019-07-18 12:07:42 An additional 2,100 troops, including 1,100 active-duty service members and 1,000 Texas National Guard soldiers, will be deployed to the U.S.-Mexico

Air Force pilot tests modified Black Hawk helicopter 2019-07-18 09:58:06 For the first time, an Air Force pilot tested an HH-60W combat rescue helicopter, which is a modified version of the Army's UH-60M Black Hawk.

Six companies to compete for $2.5B in funds 2019-07-18 09:10:08 The Navy awarded six companies task orders for a potential 10-year, $2.5 billion contract to install and support command, control, communications, co

Navy seeks proposals for unmanned surface vessel 2019-07-17 15:17:31 A U.S. Navy request for proposals calls for a new class of unmanned surface vessels.

Hospital ship USNS Comfort leaves Peru after treating 2019-07-17 15:07:43 The Navy hospital ship USNS Comfort left Peru on Wednesday, its second stop in Central America serving refugees from Venezuela.

Raytheon nets $40.2M for variants of Navy's AN/SPY-6 2019-07-17 13:41:15 Raytheon Co. was awarded a $40.2 million contract for long lead material for production on two variants of the U.S. Navy's AN/SPY-6 radar system, on

U.S. Air Force calls for proposals to replace 2019-07-17 13:21:35 The U.S. Air Force announced an RFP aimed at Boeing and Northrop Grumman for the Ground Based Strategic Deterrent, a new intercontinental ballistic m

U.S. Marines' new Mk13 Mod 7 rifle is 2019-07-17 12:11:44 An improved U.S. Marine Corps precision-firing rifle is now fully operational, the Marine Corps Systems Command announced.

Lockheed awarded $492.1M for HIMARS systems for U.S., 2019-07-16 11:36:52 Lockheed Martin was awarded a $492.1 million contract for High Mobility Artillery Rocket Systems M142 launchers and associated hardware for the U.S.

Britain's first P-8A Poseidon takes flight near Boeing 2019-07-16 09:43:14 The first of Britain's nine P-8A Poseidon patrol aircraft took off in an inaugural flight by Boeing test pilots from Renton, Wash.

BAE Systems wins $45M contract for howitzer modifications 2019-07-15 15:25:05 BAE Systems received a $45 million contract to improve the firing capabilities of the howitzers of the U.S. Army, the company announced Monday.

Raytheon nabs $110M contract for cybersecurity for Middle 2019-07-15 14:39:35 Raytheon Co. announced a $110 million contract on Monday to develop and deploy cybersecurity equipment for an unnamed country in the Middle East Nort

Christian Science Monitor |

Stock markets fall after US-China trade talk stalemate 2019-06-10 09:31:25Economists warn that U.S. and China’s escalating dispute over trade and technology will likely hurt economic growth. 

This Nebraska Republican says it’s time to think 2019-06-10 09:31:25President Trump is meeting with Democrats on infrastructure. Rural America says that, from roads to internet access, it needs to be part of any plan.

A doubly green deal? Clean energy jobs also 2019-06-10 09:31:25New analysis from the Brookings Institution suggests that transitioning to clean energy sources could open up a range of high-paying career paths.

One group not happy about older workers: young 2019-06-10 09:31:24Americans under 50 believe the rising number of older workers hurts the economy, a recent poll shows. Longer and healthier life spans have allowed mor

Robot baristas in South Korea push automation forward 2019-06-10 09:31:24South Korea's coffee scene has a new face: robotic baristas. While automation raises concerns that finding entry-level jobs will become har

SEC moves to require brokers to reveal conflicts 2019-06-10 09:31:24In the past, not all financial advisers were legally required to put clients' interest first. But some say the new measure by federal regulators does

Medicare for all – why supporters can’t agree 2019-06-10 09:31:24Support for single-payer health care seems to have risen over the past year or so, but such a plan presents complex, and controversial, choices.

Where is workforce really booming? Among the oldest 2019-06-10 09:31:24McDonald’s wants to hire 250,000 senior workers. A CVS program avows that ‘Talent is Ageless.’ And nationwide the ranks of older wor

Car trouble: How symbol of freedom became a 2019-06-10 09:31:24A record 7 million Americans are 90 days or more delinquent on car loans, a new report finds. U.S. auto debt is also at a record: $1.28 tril

Uber’s founders have cashed in. How about the 2019-06-10 09:31:24Uber relies on an army of drivers whom it refuses to call employees. But some see its “Partner Protection” plan as a model for the gig eco

As US-China trade war ramps up, how will 2019-06-10 09:31:24China-made goods will cost Americans more, as President Trump presses Beijing for trade-talk concessions. By July tariffs may hit cellphones, shoes.

Walmart follows Target to enter retail shipping wars 2019-06-10 09:31:24The nation's largest retailer joins the next-day shipping competition. Walmart has one big advantage over Amazon – its more than 4,700 sto

Home Page

Two independent Karnataka MLAs to move SC seeking New! 2019-07-21 10:59:57All the petitions are moved at a time when the Karnataka Assembly is debating the confidence motion moved by Kumaraswamy

Chandrayaan-2 countdown starts after technical snag rescheduled launch New! 2019-07-21 10:57:59The orbiter is planned to circle the Moon for about one year, imaging the surface and studying the atmosphere

GST Council to meet on July 25, decide New! 2019-07-21 09:29:48The recommendations of the officers committee is likely to be placed before the Council on July 25, officials said

Air India stops promotions, appointments as govt prepares New! 2019-07-21 08:50:12The government is looking to complete the Air India stake sale in the next four to five months

Govt asks SC collegium to rethink its pick New! 2019-07-21 08:43:39This is perhaps the first recommendation to be returned to the collegium by the present government

Crowds gather in rain as Sheila Dikshit is New! 2019-07-21 08:20:08Top Congress leaders, including UPA chairperson Sonia Gandhi and Priyanka Gandhi Vadra, were present at the funeral

McLeod Russel rejigs board amidst potential insolvency proceedings New! 2019-07-21 08:16:49Pradip Bhar, a cost accountant by profession, who was associated with WMG for over 31 years, has taken charge as the firm's new CFO

BJP won 2019 elections unfairly, is harassing Trinamool New! 2019-07-21 07:57:03West Bengal chief minister says BJP won by misusing electronic voting machines and security forces.

TikTok parent ByteDance plans to set up international New! 2019-07-21 06:15:23The company has set an internal target of 6-18 months to set up the data centre

Strong rupee, lower GDP likely to tame inflation New! 2019-07-21 06:14:47India will be the main driver to lower the inflation for the South Asian region, ADB said in a supplement to Asian Development Outlook (ADO) 2019

Another huge anti-govt rally kicks off in Hong New! 2019-07-21 05:42:25Sunday's rally is the seventh weekend in-a-row that residents have come out en-masse

India squad for Windies: Dhawan back; Saini, Rahul New! 2019-07-21 05:41:28India will play 3 T20 Internationals, as many One Day Internationals and 2 Test matches during their tour to West Indies.


Disclaimer and Notice:WorldProNews.com is not responsible of these news or any information published on this website.