As stock-picker falls to earth, beware of stars

The exposure of a “star stock picker” has been just confirmation that “stars” really are a myth.

The collapse of Neil Woodford’s stock picking prowess has left some of his largest clients nursing severe financial losses. No doubt, as Mr. Woodford’s funds were reaching for the stars, the same stars were aligning, as they always do to prove that “stars” are more often the product of luck.

There is little doubt that Neil Woodford was very good at his job. For over 26 years, he developed a stellar reputation at Invesco Perpetual, correctly calling major stock market swings.

Having departed Invesco Perpetual in 2014, he outperformed his peers, producing a return of 16%. It’s seemed that Mr. Woodford was on a roll.

But luck runs out.

So, in order to keep the returns flowing and clients happy, his fund’s bets on unlisted companies sowed the seeds of the problems that are multiplying and crippling him today. Faced with the inevitable, Mr. Woodford earlier this week uploaded an apology to the followers telling them “I am extremely sorry that we’ve had to take this decision,”

The “decision” Woodford was referring to was the one that prevented clients from withdrawing money from their funds. As always happens, when the value of any fund suffers a dramatic fall, the individual value of client’s money also decreases so the withdrawal of funds by even a small percentage of clients can have a devastating impact on values for clients that remain. It’s that ‘domino’ effect that Governments were so keen to avoid over a decade ago as the banking crisis began to unfold. Unfortunately for Mr. Woodford’s clients, the buck stopped at Mr. Woodfords office door and with no bailouts, the only option available to prevent a total calamity was a lockout.

Indexation and fees

It is said that Mr. Woodford is a big fan of Warren Buffet, the so-called ‘Oracle of Omaha’. But the man Mr. Woodford should have been following was one Jack Bogle, the founder of Vanguard, the pioneer of indexation and a passive investing approach. Ironically, it is the Bogle effect that is most undermining investment managers such as Neil Woodford. As the investing world shits to a low-fees indexing model, the scope for high-cost stars is becoming less and less.

Investing is always risky

No matter what we do with money, there are always risk. If we simply leave it on deposit earning a miniscule rate of return, it’s value can be destroyed by inflation. Where we invest it, it needs to be invested using a diversified approach to protect against the risk of loss. And in the case of the Woodford fund, where there are so-called “star” stock pickers, be wary. In such cases, it is best to take a cautious approach and if investing, do so as part of a balanced, high-growth approach. Remember, stock values do rise and fall for any number of reasons and stars, even the real ones eventually implode, it’s just a matter of time!

Frank Conway is a qualified financial adviser based in Dublin. He is founder of MoneyWhizz.org, the financial literacy initiative and also works with leading employers on a range of financial well-being initiatives.

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