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!

Here We Go Again! (Again!)

I have written many times before about the seemingly never ending Brexit process and all of the political firsts that have occurred as a result.

The last time I used the headline of this article, I was speaking of the second General Election we had experienced in just 18 months when Theresa May decided it was a good idea to try and strengthen her majority (we all know how that worked out!).

After more than 2 years of negotiation and pontification, we now arrive at yet another delay to the Brexit process – this time until 31st October 2019 – Halloween – as if the media needed any more martial to work with when coming up with headlines about the shambolic handling of the Brexit process.

Strangely, the politicians are arguing over which of the ‘middle’ options should be chosen with Theresa May’s deal looking too hard for some and too soft for others. When you speak to the general public however, they tend to prefer one of the two extremes – leave without a deal or don’t leave at all.

How this political and societal divide will resolve itself will no doubt make for some fascinating reading and watching over the coming months. It feels as if BBC News is like an episode of House of Cards or The West Wing. While it is mighty entertaining – I just wish it wasn’t the fate of our country being dramatised.

Questions will now turn to what impact this will have on markets and the economy. Given the mute response this week when the delay was announced, it seems that markets had largely priced in the continuation of the current ‘stalemate’ position for some time to come.

What is starting to be felt though is the impact of uncertainty and there is a palpable feeling of frustration when you talk to business owners. While we all knew that the Brexit process would take some time, now that we seem to be in a never ending cycle of delay, the uncertainty seems to be taking its toll on the decision making ability of businesses and with good reason.

At this point almost all of the options remain on the table. A no-deal Brexit, a second referendum, no Brexit at all, a general election – it would take a very brave man indeed to rule any of these options out. In fact, I think we have a bigger range of outcomes now than we did before the referendum and that is not good for business or the economy.

At this stage, I do hope that a solution can be found quickly (as I’m sure the rest of the voting public do too). It seems reasonable to assume that Theresa May will have to go at some point in the near future and rumours abound that this moment could come shortly after the Easter break.

The big question is whether the resulting leadership contest will also then trigger a new General Election which really would make for fascinating watching. On the other hand, perhaps the Conservatives now know better than to try and secure a mandate for a new leader!

However things pan out – rest assured – we will be watching developments closely, keeping you informed of our views (and those of the markets) along the way. You better get comfy – I feel we have a way to go on this ride yet!

 

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!

The Next Generation

I have been speaking with my clients a lot over the past few months about ‘the next generation’ in anticipation of our first ever next gen workshop later this year.

The conversations have been fascinating and have highlighted a huge knowledge gap when it comes to personal finance.

The financial world is more complex and faster paced than ever before and yet we seem to be giving young people less and less education to help them prepare for their financial journey through life.

The majority of young people now are entering the ‘real world’ without any knowledge of pensions, mortgages, credit card or interest rates. Knowledge that many of our clients will take for granted.

Although personal finance is supposedly on the national curriculum to be taught at schools, it is thought that only 40% or so of schools are actually delivering these lessons. I might also be to forward as to suggest that teachers might not be the best placed people to be delivering personal finance lessons (an assertion that teachers themselves agree with).

Although sometimes the media can create a self fulfilling prophesy, it has been well reported how a lack of financial education in schools is creating a real challenge for young people as they emerge into a somewhat harsher financial environment than previous generations.

It is well known that the young of today will face higher property prices, a lack of ‘gold plated’ final salary pensions and perhaps lower investment market growth to boot.

Although these issues present challenges, they are here to stay. Moaning about them will do nothing to prevent them and so we must take action to try and overcome these hurdles.

In my view, the first step is education. That is why we will be doing more over the coming years to educate the next generation. Our mission starts in earnest later this year when we host our very first ‘next generation’ workshop.

Our aim is to instil some of the basic financial knowledge that has helped our clients be so successful financially.

Although it is just a scratch on the surface, we have to start somewhere. Watch this space for more news later this year.

 

The Art Of The Possible

It occurs to me that as a Financial Planner, a large part of our job is to help people see what is possible.

We are often confronted with goals and desires that people believe are ‘impossible’.

“I want to retire at the age of 47 and go travelling”

“I want to quit my day job and start a new business that I love”

“I want to go on a 5 year round-the-world trip and write a travel book”

“I want to work just 3 days a week so that I can spend more time with my grandchildren”

“I want to gift my son and daughter £300,000 so they can finally buy a home of their own”

There are all real-life examples of ‘impossible’ objectives that Financial Planning has made possible.

Very often, the biggest barrier to making these things happen is us.

We get trapped in our own mis-conceptions about what might or might not be possible:

“People just don’t retire at the age of 47 – its not the done thing”

“If I work just 3 days a week surely I am just being lazy”

“If I make a big gift to my children, I might not be able to afford to retire”

We are often also terrified by what everyone else will think:

“What will my children say if I quit my job at the age of 47?”

“Will my friends think I am mad if I go travelling for 5 years?”

“My wife will think I am crazy if I walk away from my regular pay check to start a business that might not work out”

The truth of the matter is that other people are either; A – not that bothered by what you wish to do or B – more supportive than you might imagine.

Our own misconceptions are often just that – misconceptions.

With some creative thinking and planning almost any dream can be made a reality. I was reminded at our seminar last night of all the people we have helped to make the impossible possible!

New Year, New Markets?

The last quarter of 2018 was indeed challenging for markets with various factors combining to generate significant volatility over the quarter and some softening of market performance.

The biggest contributors to recent market performance have been the US / China trade war and resulting stop-start trade talks. In addition an unprecedented guidance adjustment from Apple, citing weakness in China, caused the company to lose both its much hyped $1 trillion dollar market cap and its crown as the worlds largest company.

The market clearly sees Apple’s performance as a proxy for other companies as the announcement cased a general stock market sell-off.

In the following weeks other companies have cited some weakness in trading, especially in China and many UK retailers are struggling with a weaker Christmas sales period as has been widely expected.

As we approached the end of our investment review for quarter 4, we saw a spike in volatility and as such delayed our review work by approximately 2 weeks to allow for a like-for-like comparison.

Over the holiday period volatility persisted and between Christmas and New Year, we saw some of the most significant moves ever recorded in US stock market history. Over the 3 months to the end of December the US Market was down by around 11.9% and the UK fell by around 9.5%. Given their diverse, global nature, the Buckingham Gate portfolios are behaving as expected and are significantly softening some of these losses.

As we have entered 2019, relative calm seems to have returned for the time being and markets are showing tentative signs of recovery, although it remains to be seen if this will persist.

Ironically, despite the near constant media attention, Brexit (or the potential lack of) does not seem to have caused too much concern for markets, although the weakness in the UK market compared to others over the past 12 months suggests that much of the current uncertainty is now priced in.

It remains to be seen if any further clarity will be delivered by the parliamentary vote over the coming weeks or if (as is expected) a ‘no’ vote takes us back to square one in the Brexit process.

The Buckingham Gate investment committee will continue to monitor events carefully, however we don’t see that the events of the past 3 months are particularly unusual or unexpected.

The past decade has seen record breaking growth in most major global markets and so some easing off is to be expected. In addition, despite much media commentary about high volatility, the level of volatility we are now seeing is almost exactly the average. 2016 and 2017 are actually the exceptions to the rule given the extraordinarily low levels of volatility seen over these 2 years.

The largest indicator of a more permanent downturn in markets is a recession and although there has been some softening of data in some markets, recession would seem to be a way off at present.

There are some potential upsides to bear in mind. Brexit might not be as damaging as some people expect, the US and China could quickly rectify their troubles and retailers could quickly turn things around.

We will be managing the portfolios with our investment partners cautiously, taking into account the market environment we find ourselves in.

We would like to wish all of our clients and contacts a very happy and healthy 2019!

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.’