An old joke about the investment industry is that when a client finds out that all the yachts in the local marina are owned by investment professionals, she is naive enough to ask, ‘but where are the client’s yachts?’
When we set up our company five years ago our original registered name was Woodford Asset Management. The reason for the name was logical as the two founders were, and still are, a Mr. Wood and a Mr. Bedford. When we tried to put these two names together Woodford seemed reasonable. However, almost as soon as we registered our name Mr. Woodford announced that he was launching Woodford Asset Management. At this point we could, if we had been awkward, perhaps tried to sell his own name to him, but decided it would be easier if we just changed our original name from Woodford to Woodhill.
Since that time, it has felt that the fate of ourselves and Mr. Woodford were somehow linked. We were both setting up new UK-based asset management businesses at the same time. There were however some important differences between Woodhill and Woodford right from the start. We regarded ourselves as being a tortoise to Mr Woodford’s hare and five years later this is how it has turned out.
We are not here making any criticisms of Mr. Woodford. We can safely leave this to the same media and wealth manager crowd that praised him with such enthusiasm five years ago. Rather, we would like to draw attention to very real issues in the fund management industry and those who report on it.
Above all, it seems to us the media and the wealth management community are just not interested in anything that is new. Looking back to when we launched, we can now only laugh that we thought that the industry would be interested in innovation – it just isn’t. Our approach, as we have tried to tell many times, is to improve returns by reducing risk. We avoid over leveraged companies, own only highly liquid stocks, try to avoid excessive valuation. In addition, we protect the value of the portfolio through frequently hedging the entire value of the fund.
The net result is a fund that minimises market risk and gives some genuine protection against tail-end risk (the fund is effectively net cash 70% of the time). Timing our fund purchases is not the casino-type risk new investors take in long-only funds. Throw in a relatively low-cost fee structure and you have fund that we would like to invest our own money in.
At the time of writing, we are doing what we set out to do, offering 3.4% annualised returns* for the last three years with low volatility. We naively believed that this new and very risk averse approach would be interesting to people. It may not be for everyone but was something that we thought would gather a little bit of attention and discussion. Sadly not, we found again and again that the wealth manager industry is nervous about any fund that was not being run in the same way as all the others, safety in numbers perhaps.
We can think of two famous name UK-fund managers who left large UK investment institutions to set up either their own funds or were given new high-profile funds to run by their employers. In both previous cases the media attention was an almost embarrassing breathless excitement. Coverage was consistently positive and relentless. Public relation companies fed journalists the stories about how these managers were a marvel. The resulting investment performance was poor to say the least.
It appears the same thing has happened again with Woodford Asset Management. The media coverage was huge and largely unquestioning. Readers of national newspapers were relentlessly encouraged to put their savings with Mr Woodford. At the same time, high profile large wealth manager groups got involved channelling substantial amounts of people’s savings into these funds, backed-up by armies of fund researchers. Why did all of this happen? Celebrity status certainly played a role but is in our view, only part of the reason.
The reality, we suspect, especially with the wealth managers, is that analysis comes a distant second to the overwhelming desire to be doing what everyone else is doing. At times it even seems as if the investment community will do almost anything in its power to avoid taking any decision that differentiates them from the flock. Why is this? The answer is simple. If you do the same thing as everyone else, it is hard for you to be “wrong”. It might not be the best decision for the client, but it is for the wealth manager.
So where does this leave things? Hopefully something positive can come out of this recent Woodford drama. From our perspective we feel (and I suppose we would) that perhaps the financial news media could report on new approaches and innovation rather than famous names doing the same sort of thing, time and time again. Everyone is human, change is difficult and independent research is hard. It should however be ultimately rewarding for both client and manager. T
here has been quite a lot of handwringing in the media about how the Woodford events have damaged trust in the industry. The damage can be repaired through looking at the new, at not just following famous names, and through acting independently. Now is a great time to make these changes.
*Morningstar Historical prices are not necessarily indicative of future results.