A Fallen Star: Neil Woodford

It’s with a heavy heart this week that we learned the news of the suspension of the Woodford Equity Income Fund.

Only a few years ago, Neil Woodford was the shining star of the fund management world. If there ever has been a household name in the fund management world, Neil Woodford surely has to be that name.

To give you some background on what’s happened, the Woodford Equity Income Fund has always had a relatively small proportion of its investments in unlisted or smaller companies. Neil Woodford has always maintained that these companies have incredible growth potential.

The problem with unlisted or small companies is that they are hard to value, illiquid and sometimes hard to sell (especially when under duress as is the case now).

In recent years, the performance of the fund has been very disappointing, to the extent where the Woodford Equity Income Fund has been at the bottom of most league tables for at least two years now.

As a result, investors have been withdrawing money at a fairly rapid rate. This all came to a head last week, when Kent County Council requested 250 million pounds back out of the fund.

When a fund manager gets withdrawal requests of this size, they generally have to sell assets in order to meet the redemption. Given the illiquid nature of some of the assets at the bottom of the portfolio, Neil Woodford has been selling the larger and more liquid companies that sit within the fund in order to meet these redemption’s. As a result, the percentage of smaller and unlisted companies within the portfolio has grown over the past 12 months to the point where it’s exceeded the 10% limit imposed by the regulator.

Neil Woodford then listed some of the smaller holdings within the fund on the Guernsey Stock Exchange and has also exchanged some of the smaller assets within the fund for his own Patient Capital Trust shares (this is an investment trust, also run by Neil Woodford, which specialises in smaller company investments). Many commentators have expressed concern over these actions and how legitimate they are.

Even if they do comply with the letter of the law, I am almost certain they don’t comply with the spirit and indeed the regulator is now investigating these Guernsey Stock market listings.

There are lots of lessons to be learned from this debacle.

First of all, I think it highlights the risks involved in self-investing. Most self-investors use the research and recommendation tools from the broker or the platform that they use to purchase investments.

In this particular case, the Woodford Equity Income Fund was heavily, heavily marketed by some of the biggest names in the self-investing (and advisory for that matter) world. Self-investors bought the fund in their droves and while they may have been aware of the poor performance, I would be surprised if many of them had been aware of the developing liquidity problem within the fund.

Although clearly, I have an element of self interest in promoting the value of professional financial advice. I think it is probably fair to say that the vast majority of self-investors do not have access to the level of information required to make an informed judgment on how suitable the Woodford Equity Income Fund was for their needs, especially as time went on.

What started as a traditional large cap UK equity Income Fund, ended up becoming arguably quite a risky small cap speculative investment. Unless you had your eye on the ball, this shift in style and strategy may not have been obvious.

The vast majority of well-run advisory firms I know (ours included) pulled the fund out of most client portfolios a couple of years back. I recall the Buckingham Gate Investment Committee agonising over what, at the time, felt like quite a controversial decision. “Pulling Neil Woodford out of the portfolio just because of 12 months of under-performance, you must be mad” was uttered to me by one interesting individual at an investment seminar!

2 years later that decision looks incredibly sensible, although I don’t profess to have foreseen the liquidity issues ahead of time. Basically, the data was telling us that there were better options out there, so we followed the data. It is as simple as that.

It seems the only organisations that continued to promote the fund, despite what has now been a very extended period of significant under-performance were those who had too much skin in the game or who had some sort of commercial arrangement with the now embattled fund manager.

I think another issue, which becomes clear here is people getting carried away.

I think it’s fair to say that Neil Woodford probably got a bit over excited when it came to re-positioning the portfolio in line with his once-famous conviction. What started as a slight transition towards some of the smaller and more domestically focused stocks (in the belief that they would out-perform after the Brexit uncertainty fades away – a point on which he could still be proved right, if we can ever break the Brexit impasse), turned into a wholesale shift away from the large-cap income stock on which Woodford made his name into medium and smaller companies, many of which the average investor has probably never heard of.

Finally, there is an air of desperation about the actions taken within the fund. As the performance got worse and worse and the losses got deeper and deeper, it seems that more and more risk was taken within the fund in order to try and recover some of those losses. A strategy which has now failed spectacularly.

What happens next is unclear. The fund is now suspended for 28 days and this may be extended. Given the severe outflows from the Woodford funds over the past week (by my count, he has lost in excess of £4bn this week alone) I wouldn’t be surprised if the fund gets merged into a larger UK equity fund or it could even be wound down.

With all of this said though, things might not be quite as bad as they seem!

The UK regulatory system ring-fences client assets and within an open-ended fund, the value investors receive is simply the value of the underlying assets within the fund. Neil Woodford’s demise doesn’t really do much to change that value, to the extent that share prices come under pressure because he is a forced seller.

When it all boils down though, those who will be most impacted by the suspension and the resulting fallout will be those who did not follow the basic rules of investing in the first place.

Have your money in a range of different funds, from different fund managers.

Diversify across sectors, geographies, assets classes and strategies.

Don’t take more risk than you need to.

Continually monitor and review your investments.

These rules have worked for the past couple of hundred years and I suspect they will continue to do so. It is those who don’t follow the rules who get hurt!

Look Who’s Talking

Blog post by Jamie Kyte, Chartered Financial Planner, Buckingham Gate.

Five weeks ago, I had the overwhelming joy of welcoming my second child into this world. Ella Grey Kyte weighed in at 7 pounds with a full head of hair, very lady-like pout and a healthy set of lungs!

I wasn’t as emotional for the birth of my daughter, not because I wasn’t as delighted, but because the flood of emotions at experiencing your first born being pulled out of your wife’s stomach is so shocking, stunning and precious, that the feeling can never quite be repeated.

Ella has been fantastic over the first few weeks. Of course, she’s caused us night after night of disturbed sleep but the pleasure of holding this beautiful girl at 12am, and 2am, and 4am as she stares intriguingly wide eyed at my face probably not knowing who I am, makes it all okay!

Like with my son Jake, having a baby once again puts everything into perspective. The moment Jake came into this world I realised that I would do anything for him and as he’s grown up, I’ve made sure that I spend as much time with him and my wife as possible.

If you are a client of mine, you may have had me ask you the following in one of our meetings:

  ‘‘Imagine you visit your doctor who tells you that you have five to ten years left to live. The good part is that you won’t ever feel sick. The bad news is that you will have no notice of the moment of your death. What will you do in the time you have remaining to live? Will you change your life, and how will you do it?’’

When I answered this question, I decided to make a change to the way I lived. Often, I would come home past 7pm on weekdays and on weekends I wouldn’t spend quality time with my wife and son. Having answered this question and gone through the life planning process, I decided that if I were faced with this dilemma I would want to spend as much time with my family as possible and make sure that they are able to continue living our lifestyle when I’m no longer here.

From this, I decided that going forward I would always be home for Jake’s bath time, and on the weekend, we would spend quality time as a family. In addition, I made sure that I had the right protection in place (not just a nice number), so that if I was no longer here my family could continue living our current lifestyle.

Whilst most of Buckingham Gate’s clients are either approaching financial independence (retirement) or are already there, we also work closely with families who are in the same position as myself and that are in the accumulation stage with young children.

If you or a family member would like to pop in for a complimentary meeting to discuss how to put the right planning in place when you have a young family, feel free to call us on 020 3478 2160 or email us at contact@buckinghamgate.co.uk to arrange a meeting.

Just When You Thought It Was Safe…

Just when you thought it was safe to go back into the water. Donald Trump happened. Again!

The events of the past week or so just go to show how unpredictable markets and investing can be. Up until late last week, things were looking very rosy indeed. The US markets were just within touching distance of their all-time highs, the UK was performing well and most other major stock markets had posted some impressive numbers also.

Economic fundamentals were looking good. 3/4 or so of the S&P 500 companies had posted results exceeding expectations, the US and UK had some record breaking jobs numbers and the US/China trade deal was about to be signed. What could possibly go wrong?

Well… Our good friend Mr Trump is what can and did go wrong, with his surprise increase in tariffs on many Chinese imports.

There is a consensus that the last round of tariffs, broadly set at 10%, were just about manageable for US importers and that they have absorbed this cost rather than pass it on to their customers. A 25% tariff is a very different matter and this could well lead to higher prices for US consumers, which will do nothing to help future economic growth in the worlds largest economy.

What has been especially surprising is the reaction of both the US and Chinese markets to these developments. When Trump tweeted that he was considering increasing tariffs on Chinese imports, both the US and Chinese markets fell sharply. On the day the tariffs actually took effect however the Chinese market went up by 3%.

How does that work? The threat of the action caused a widespread selloff in stock markets across the world, but the action itself seems to have triggered a rally.

I wish I could come up with some logical and intelligent explanation, but sometimes there simply isn’t one. We just have to admit that over the short term markets are totally unpredictable.

The fact of the matter is that although you may have been thinking that it was safe to go back into the water, you never should have got out in the first place!

The Importance Of Financial Education

A couple of weeks ago, I attended the latest Personal Finance Society (PFS) Regional Conference, and as the Professional Qualifications Officer for Kent, I presented some slides to other financial professionals on the initiative by the PFS for members to provide pro bono financial education sessions within local secondary schools.

The content is in the form of a board game and looks to provide students with tips on understanding investment risk and financial budgeting, but for me the most important objective is helping young people to avoid financial scams. It reminded me of an article that I’d read on the BBC website a couple of days earlier about London Capital & Finance which went into administration after taking £236 million from investors.

Their marketing campaign targeted first-time investors with promises of fixed interest returns of 8% from secure ISA’s and would spread investment risk over hundreds of companies. The reality was that 25% of the investments made were paid as commission to the marketing agent, and then funds were lent to a total of 12 companies – four of which had never filed accounts and nine were less than three years old!

The financial crisis of 2008 showed that even well-known and reputable financial firms are not immune from the perils of administration, but in the current low interest rate environment, a guaranteed investment offering a return of four times the best Cash ISA rate on the market would be treated with scepticism by the majority of experienced investors.

The government have introduced incentives such as Junior ISA’s and automatic enrolment to encourage younger people to start saving earlier in life, but it is important that we educate them on managing money responsibly. For those children fortunate enough to have parents and/or grandparents funding Junior ISA contributions, they will take over sole responsibility for the management of the account on their 18thbirthday. What’s to stop them investing in the scheme they saw on social media promising double digit returns, and looks so much more interesting than their existing investment?

I’ve done a number of surgeries to talk to people about the pension benefits offered by their employer, and some of the people I speak to are just out of school or university. For the majority this is probably the first conversation they have ever had about pension provision, and while there are those who are lucky enough to have parents who they can turn to for help, I’ve met young people who struggle to understand how deductions from payroll such as Income Tax and National Insurance operate.

Matt wrote a blog a couple of months ago about our intention to host workshops to provide the tools the next generation needs to be successful financially, and while the goal of any investment is to make some money, it is probably more important to teach the lesson of how not to lose it all.

Finally … Some Good News

I have watched with fascination over the past few days as the Space X Crew Dragon Capsule has successfully been launched, made it into orbit and docked with the International Space Station, marking the first time a US built space craft capable of carrying humans has been launched since the space shuttle programme was retired in 2011.

I remember the day they announced that they were retiring the shuttles and it was a sad day in my mind. It felt like a backwards step – like we were undoing many years of human progress. Like we were giving up, just when space was starting to become accessible.

If nothing else, the Space X story has provided a break from the constant Brexit related news and political infighting which I must say was very welcome. But I think it represents more than that. I think what we are seeing here is the birth of a brand new industry and a new chapter in human space exploration.

Elon Musk one day plans to host a ‘base’ of some kind on the moon. As implausible as that might sound, it would take a very brave man indeed to bet against him achieving that objective. He has, after all, accomplished almost everything that he said he wanted to do (albeit very often over time and over budget). You can say what you will about the man, but you can’t take away from his acheivements.

Can you imagine back in 2002 when Elon Musk founded Space X and he sat down round the dinner table and told his friends and family that he was going to send a rocket into space. This ‘normal’ guy, not affiliated with NASA or any international space agency, was going to build a rocket and send it into space. The people in the room must have thought that he was genuinely insane! I am surprised he wasn’t committed there and then.

But yet, here we are, 17 years later and that crazy, ludicrous, impossible dream has become a reality and that is what I find so exciting about this week’s launch.

Yes – it means we are one step closer to commercial space travel, which I dearly hope is something I can partake in during my lifetime. As soon as tickets into space fall to some sort of affordable level, you can sign me up!

Yes – it means that the US space program is back in businesses, which is incredibly exciting.

Yes – it means that we could see a base on the moon one day.

But, more than that, it represents the power of human ingenuity and determination. It shows what is possible when people believe in something, no matter how crazy it might seem. If that doesn’t give you confidence in the human race, in the markets, in the world, I don’t know what will.

I will watch with intrigue later this week as the Capsule makes it’s decent to earth. I dearly hope it all goes to plan, but, even if it doesn’t, I am pretty confident of one thing. Elon Musk will not give up!

Although Space X remains a private company, I think it is only a matter of time before it, or a company like it, goes public and it will be very interesting to see what the market makes of mankind’s space adventures!

Reflections on 2018

As 2018 draws to a close, there is a lot to reflect on and consider.

First of all we have the seemingly never ending Brexit discussions and negotiations with the final date for the vote now set for the week of January 11th.

If the vote is ‘no’ as seems to be widely expected, then this opens up another can of worms about the possible options. The BBC produced a very useful decision tree highlighting the possible paths that could be followed after a ‘no’ vote and I think I counted over 20 different combinations when I looked.

On the other hand, if Theresa May is to pull out a surprise ‘yes’ vote, then at least we will have some clarity over the future direction of travel, regardless of your views on the ‘deal’ itself.

It is important to bear in mind that Brexit is very much a UK issue. Markets elsewhere in the world do not seem phased by Brexit or the surrounding game of politics. They have other things on their minds. Talking to an Austrian chap at a recent business coaching event, it was interesting to hear how they see Brexit. Most Austrians, he informed me, simply think we are mad for having initiated the whole process in the first place. Given the resulting chaos – perhaps they are right!

Elsewhere there have been plenty of goings on to keep people occupied and despite the fact that we can’t get away from it here in the UK, Brexit is barely mentioned (nor does it need to be) in some of the other global markets such as the US and China.

Although we have seen some market volatility in the latter part of 2018, this is simply a return to ‘normal’ levels which are in contrast to the unusually calm 2017.

We have started to see some minor interest rate hikes across the major western economies. As I have written about before, although this could be a bit painful for markets in the short term, it is a very necessary part of our recovery from the decade-old financial crisis and is (at last) a small sign that things are returning to ‘normal’.

Although I will never try to predict what the following year holds (the last 2 or 3 years have taught us to expect surprises, both political and financial if nothing else) it can often be helpful to review the fundamentals of the global economy. I would encourage you to read this article from 7IM which provides some useful insight on the state of play and a calm, rational analysis of things potentially to come in the future.

Regardless of what is happening out there in the world, we remain long term investors. We don’t try to time the markets and we don’t panic when things seem tough.

As I wish you a very Merry Christmas and a happy 2019, I shall leave you with the words of Warren Buffet – a calming influence when the world seems to be going mad:

‘The most common cause of low prices is pessimism – sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It is optimism that is the enemy of the rational investor.’

 

Reflecting On Brexit

The past few weeks have certainly been interesting not just from an investment perspective, but also politically as well.

As I pen this note, the Brexit deal would seem to be getting ever closer to a conclusion, however, Theresa May still has one almighty hurdle to jump in the form of getting the deal agreed by parliament back in the UK.

Ironically, this could well be the toughest part of the whole process for our embattled Prime Minister. Regardless of your opinions on Theresa May in general, I think we can all agree that her job at the moment is near impossible. I certainly don’t envy her!

As I have spoken about before, I believe that the next few years could be punctuated by things which are good news in the long term causing short term market volatility.

If this does come to pass, it will be the opposite of the rather strange environment we have found ourselves in over the past couple of years since the Brexit vote, where things that have been perceived as ‘bad news’ have been very positive for the markets.

The Brexit vote itself is one such example.

Of course, before the event, there were prophecies of doom and destruction in the event of a leave vote and indeed we did get some serious market sell offs … for all of 2 days.

After this, something unexpected happened. The de-valuation of sterling actually turned out to be positive for markets and indeed, this factor has probably been the biggest contributor to UK market performance over the past few years.

This is one example of bad news being good news for markets. The election of Trump could well be another.

As we move into 2019, I expect this trend to reverse.

If we do (ever) agree a Brexit deal, I would imagine that we might see sterling strengthen somewhat. This is good news in general for UK PLC, but could be bad for UK markets in the short term.

In a similar vein, increasing interest rates and the unwinding of quantitative easing (both good things in the long term – signalling that we are finally getting back to ‘normal’ economic health), could drag on markets in the short term.

These things, despite the short term pain they might cause, are totally necessary for the economy to build a solid foundation on which to grow into the future.

The past decade of growth has been partially fuelled by artificial stimulus and this process has to come to an end at some point.

The ending of the artificial stimulus programmes around the world could well be the best thing to happen to markets in a long time, creating a solid and stable base for the next period of growth which will inevitably be to follow.

While unsettling, the volatility we have seen over the past few weeks does not concern the Buckingham Gate Investment Committee greatly. This type of market ‘wobble’ is fairly usual as we start to approach the end of the market cycle.

That’s not to say that the cycle is over at this point, but we should be prepared for a slightly more volatile ride ahead.

The main predictor of a significant market correction or a ‘bear market‘ is a recession and although global economic indicators (job numbers, GDP growth etc) are not the best we have ever seen, they are not bad either.

There is certainly nothing in the figures to indicate a recession at the moment, although things can and do change quickly.

As usual, we must insert that caveat that the past is no guide to the future and things can be unpredictable in the wonderful world of investments.

I shall keep the blog updated with my views. All eyes now are on the 11th December and the deciding vote.

The Generational Divide

I have been speaking recently to clients about the so called ‘generational divide’ – the seemingly vast wealth of the baby boomer generation with their burgeoning property and investment portfolios when contrasted with the apparently hopeless state of the millennials finances.

I have long argued that these types of generalisations are very unhelpful and don’t really serve to achieve anything.

In fact, I think media narratives like this have the potential to become self fulfilling prophecies if we are not careful.

If millennials are bought into the fact that they are ‘doomed’ to rent for their entire lives and they they will never retire, then this is probably what will happen.

I have a bit of a bee in my bonnet about this issue and, in our own small way, we are committed to doing something about it.

Next year we will be launching the first Buckingham Gate ‘next generation’ workshop to hopefully teach our client’s children some of the lessons that have made them so wealthy.

This is the subject matter that really should be being taught in schools but definitely isn’t (and if anyone thinks a 30 minute ‘general studies’ session on personal finance qualifies as sufficient financial education to prepare young people for a lifetime of financial decisions they are sorely mistaken).

We will also be covering some of the slightly more advanced wealth building strategies that have served our clients so well.

I will keep the blog updated as we finalise the plans for the workshop next year and we will be announcing the date early in 2019.

We hope to see as many of your children there as possible.

Keep Calm & Carry On

Keep Calm & Carry On. Sage advice in times of market stress.

Countless research has shown that missing just the best few days of returns in the market is enough to significantly dent your total investment return.

Research by Fidelity has shown that if you had your money invested in the FTSE All-Share from the end of June 2003 to the end of June 2018 (15 years or approximately 5500 days), you would have earned a very nice 8.9% annualised return. Not too bad by any standards.

If you miss just the best 10 days of performance (out of those 5500) then your total return falls to just 4.6% per annum.

Miss the best 20 days and it falls further still to only 2% per annum.

If you miss the best 40 days of returns (again to stress, out of a total of 5500) then you actually get a negative return of -2% per annum.

The same research has been replicated across many different markets all over the world and the results are very similar.

This shows the importance of remaining invested, even when markets get turbulent.

In this world where investment decisions are made by computers in milliseconds and the distance from the stock exchange determines which trading house wins, anyone who thinks that they can time the markets is either lying, deluded or both.

Research has also shown that so called ‘investment experts’ and analysts have a pretty much exactly 50% chance of success when trying to predict when markets will go up or down. You might as well flip a coin to predict the direction of tomorrows markets, it has as much chance of being right as anyone else out there.

Im pretty sure on Monday of this week no one predicted the falls we have seen on Wednesday and Thursday. If they did I am yet to hear about it.

The point is that markets move very quickly.

If you attempt to time the market, the chance of missing those best 10 days is very high indeed. Markets can and do recover quickly and the biggest gains (i.e. those best 10 or 20 days), tend to follow significant market falls.

We only have to look back as far as February to see a similar phenomenon in action. In the early days of the month, the S&P 500 dropped around 8-9% over just a couple of days. Of course this was widely reported in the media with the usual collection of colourful language such as ‘turmoil’, ‘chaos’, ‘panic’ and, my personal favourite, ‘bloodbath’.

What received almost zero mainstream media coverage was the subsequent recovery. Only weeks later the S&P 500 has recovered the 8-9% it lost and it then went on to break new record highs only a few weeks after that.

Calm seems to have returned this morning on the markets. Could this be the start of the next recovery, or just the eye of the storm?

The truth is that no-one knows, but the time-tested investing adage of ‘time in the market, not timing the markets’ is as valid today as it ever has been.

Keep Calm and Carry On. It’s the only way to invest.

 

 

Is This The New Way Of Working?

In recent years, we have definitely seen a trend towards people who are supposedly ‘retiring’ not actually retiring.

Instead, many people who choose to ‘retire’ from their traditional 9-5 job (and this ‘retirement’ may or may not include drawing on some sort of pension) are choosing to do some sort of contract work, write a book, do some consulting, start a business and many other things that you might describe as flexible employment / self employment.

This ‘flexible working’ environment is one that is traditionally reported to be favoured by millennials. The reason this is on my mind is that PWC has just announced a ‘flexible talent network’, which is basically a bank of people who can register to perform contracts with the accountancy giant.

As a worker in this new flexible talent network you can work a 100 day contract, take a month off to travel, return to a 50 day contract, have 3 weeks off over Christmas and then pick up a longer term 200 day piece of work. All of this without the perceived ties of formal employment.

It seems however, that boomers, Gen X and everyone in-between is finding this idea of a more flexible working life attractive. Indeed, I would suggest that of the clients we have helped to ‘retire’ over the past few years, going into some other sort of ‘work’ is the norm.

This got me to thinking – could we soon enter a world where very few people are actually ’employed’?

Instead, we could find ourselves with a whole army of freelance workers, performing contracts and services for other companies on their own account, rather than by virtue of a contract of employment.

This is arguably great for some industries and professions. Accountants need extra support around tax return time. Some businesses have very seasonal demands on their output. In these cases, this new flexible workforce will be great. An on-tap resource available at short notice on a pay-as-you-go basis.

There are some professions however, where flexible working (and when I say flexible, I mean not being employed in this context) might not be a good thing. I think Financial Planning is a case in point.

How would you feel if the adviser you were going to trust with your life savings was just working on a 50 day contract?

How about if every time you walked into the office you had a different group of staff welcome you?

Financial Planning is all about stability. People like to know that their financial future is in safe hands both now, but also for the next few decades and I believe long-term relationships are the best way to make that happen.

While I am all for this new flexible working world that seems to be emerging, in the financial planning business at least, I think the permanent position is here to stay.