The news last week that the Woodford Income Focus fund was being closed to withdrawals to prevent a run on its assets caused a flurry of media articles examining the potential repercussions on investors and the wider investment community.
I was contacted on Thursday (17 October 2019) by a journalist from the Sunday Times, who was writing a feature on the topic. If you subscribe to the Sunday Times online you can read the whole article here.
Most of what we discussed on active vs passive investing didn’t make it into the article, but naturally I was asked if PortfolioMetrix had invested in any of the relevant Woodford funds. I explained we hadn’t and why.
Here’s a quote he used from me as to why: “It certainly wasn’t the case I thought this was going to be a big problem down the line for liquidity…but whenever we asked about what happened if they were wrong on a particular position, we could never get a clear answer.”
Investors first, industry second
Quite apart from whether we invested in Woodford, his questioning covered some important topics. He asked what I thought the effect of the Woodford issue was on the industry and whether active managers were feeling any pain.
This is an interesting question, but it’s not the most important. As should always be the case, clients come first. And in this case, investors have been appallingly treated and suffered mightily. The focus now should be on mitigating the fallout for investors in Woodford’s funds.
The wider implications for investors should also be considered. The huge amount of publicity around the issue has also undoubtedly had an effect on trust between investors and the investment managers. Any profession requires trust between relevant stakeholders and, when it comes to investments and investing, trust is absolutely paramount. Investors will only achieve better outcomes when two things are true: they trust the investment professionals they rely on AND those individuals (and companies) are worthy of that trust.
Active v passive & closet indexers
With regard to active management of funds, we discussed if the negative fallout around this issue will make it harder for active managers who are already feeling competition from the passive alternatives.
My position on this is that passive competition is good for the end investor. Access to passive routes is helping the industry to reduce the impact of the worst part of the active industry, the closet indexers who purport to be active managers but are really just lazily tracking an index while charging a premium. On the other hand, there will always be a place for true active managers – those who do strong company research and take non-index positions that reflect that research.
Fund selection research
In our own portfolios, we use a blend of active managed funds and support these with passives where we can’t build sufficient conviction.
While I firmly believe it’s important to include active managers in our portfolios, there are both skilled and unskilled managers out there so the key is to do quality research to identify them. Research is at the heart of our fund selection process and using a mix of qualitative and quantitative research is central to enabling us to filter managers into the skilled and unskilled.
Proper portfolio construction is crucial too through, with the key here that it’s essential to diversify across different mangers. No decision-making process is ever perfect, so you shouldn’t ever choose just one manager (or asset class, or sector, or currency or country). In my opinion, diversification is absolutely fundamental to investment success…but that’s another story for another day.