Investment genii come and go, but normally not quite so fast as Neil Woodford. After several successful years of stock picking at Invesco Perpetual, his reputation was such that when he set up on his own, he was overwhelmed with money. And that was both his fortune and misfortune.
Some middlemen make their money by sating the appetites of those who already have too large a proportion of their assets with flavour-of-the-month managers. They, and others, quickly swarmed over Mr Woodford.
St James’s Place, Hargreaves Lansdown, this pension fund adviser and that county council pension manager were among those who shovelled their millions his way. Some did not bother to properly check why Mr Woodford had been successful, instead contenting themselves with salivating over their expectations.
And Mr Woodford had been good as a stock picker, particularly among smaller companies overlooked by the big boys, or new or out-of-favour stocks requiring courage, imagination, and patience.
This ability to see the income potential, when few others can, is what makes a good investment manager, since it is only an above average and growing income that justifies rising capital values. This is the only magic behind successful investing.
Illiquidity issues
The irony of Mr Woodford’s failure is that the denouement took place at roughly the same time as the Association of Investment Companies was adding to and rejigging its investment sectors. Its goal was to ensure these groupings remain relevant given the proliferation of market indices and new asset classes seen over recent years. One of the fastest-growing sectors of the AIC universe is that which houses those investors keen to hold ‘illiquid’ investments, such as property or private equity, for which a closed-ended investment trust is ideal.
Such a structure would have saved Mr Woodford, and bought him the time for his strategy to work. But he was brought up in the open-ended world, where the emphasis is less on performance than marketing, and often more to do with gaining assets under management than satisfying clients. Setting up his own company allowed the manager to profit from his early success more than would have been the case at Invesco Perpetual. But he would not have been allowed to invest as he did if he were still working at that company as part of a hierarchical structure.
Classification changes
For full details of the 13 new investment trust categories, as well as 15 renamed groupings and 21 unchanged sectors, the best resource is AIC’s own website. Some of the categories might suggest Woodford-type risks lie within.
Property lending can certainly be profitable, but any quick glance at the history of banking makes clear quite how dangerous this activity is. At some points loans are hard to get, and margins are thin, but at other times the opposite is true. And going from feast to famine can unsettle lenders, and suddenly they find themselves having both lent and borrowed too much – and loans, even assuming they are good, can be hard to liquidate quickly.
