It was once noted that all political lives end in failure. It could be argued that a similar fate often befalls “star” investment managers. Anthony Bolton and Bill Gross are just two recent examples of managers whose long track record of successfully beating the market quickly faded. It seems that with the news of Neil Woodford’s decision to freeze his flagship equity income fund following a period of poor performance, the hype surrounding the Woodford name has dissipated.
This is not only worrisome for direct investors in the Woodford fund but will have a wider knock on effect. This is highlighted by St James's Place swift removal of Woodford's mandate to manage several of their funds. Woodford was responsible for the St James's Place UK High Income Unit Trust, UK Equity, Income Distribution and SJPI UK High Income funds. At the time of writing other institutions are also following in quick succession.
As Nobel Prize winning behavioural scientist Daniel Kahneman noted, losses loom larger than gains. One could argue that the St James’s Place decision shows panic, the need to limit potential losses is often contagious and not only limited to retail investors. While one would not wish Woodford’s fate to befall any investment manager, the reality is that it is very difficult for any investment manager to consistently outperform the market over the long term.
Active managers, such as Woodford, seek to employ a strategy where their funds aim to beat the returns generated by the market. In comparison, passive funds track the performance of the market. A majority of active funds fail to beat the index over any significant period after accounting for costs. Most of those that do ultimately find their outperformance to be fleeting. Academic studies typically attribute between 85% and 100% of a portfolio’s performance characteristics to strategic asset allocation policy, attributing far less significance to tactical asset allocation and stock/product selection.
In my next piece, I will look at portfolio construction in more detail, its role in effective financial planning and the factors that contribute to consistent long-term performance.
If you have any concerns about how your investments are performing or the underlying risk associated with the portfolio, we’d be happy to offer a free initial consultation to understand what best suits your circumstances and financial objectives. Before making any decision you should talk to either a tax or investment professional.