This is big news. The key issue is what next for investors?
The media has reacted to the suspension of trading with Neil Woodford’s fund. You can check out the links below for more information. My focus is to help investors think more about their actions.
Let’s start with Hargreaves Lansdown (HL). Much in the Media has talked about the role of HL. Their business grew as DIY investors needed a platform to trade. To give help to DIY investors who were not experts, HL offers ‘Best Buy” lists. So what happens? People buy from the Best Buy list. Clearly, investors have delegated their responsibility to HL for their decision making even though they are DIY investors. They have trusted HL to do the due diligence and provide investors with a short cut to which funds to buy. The question is whether the Best Buy lists are Best for HL or best for the investor?
HL has keenly supported Woodford for many years, which ultimately has been to their benefit.
The lesson for investors is simply if you don’t understand what you are investing in, don’t invest. Otherwise, you will face ‘unexpected’ problems that many are facing today. If you have no interest in understanding more about how money is invested, your only real options are to take market risk through index-based funds. This would inevitably lead to the demise of firms like HL over time.
Over many years Woodford garnered a reputation for success. There were also others like Anthony Bolton who for many years managed the Fidelity Special Situations Fund. The success of these funds when measured against the FTSE All Share has been plain to see. Yet that’s clever marketing. By using the FT Chart tools, you can compare these funds with other indexes. For example, when these successful funds are compared to FTSE 250, they don’t look as successful. As such, the ‘aura’ that is attached to these ‘star managers’ is much more related to how we feel rather than logic.
Most investors don’t really care where their money is invested in providing it has successful outcomes. If they really cared, they would have carried out their own due diligence. What Woodford now shows investors, it’s important to understand the risks each fund manager is taking with your money. Yes, we all want great outcomes, but are we clear about the ‘means’ to generate the ‘end’?
Perhaps it time for investors to take back more control over their investments. To take more responsibility for their money. Much is an education process. Too much trust allows the agency principle to take hold. The Woodford debacle could provide a wake-up call to investors to take more interest in their money, to ask better questions how their money is invested, to ensure they get a fair return on their money for the risks they take.
More information can be found by following these links:
The run on Woodford leaves broader sector exposed
Woodford tremors rock City as investors revolt over fund freeze