When it comes to investing, using managed funds is often seen as a more hands-off approach. After all, you’re paying a fund manager to select investments and deliver a return. However, the recent events with the Woodford Equity Income Fund highlight why you still need to keep an eye on investments.
A managed investment fund pools your money together with other investors to invest in a range of assets, with a professional making investment decisions. As a result, the value of your investments can rise and fall depending on how the value of the underlying assets change. As the fund manager actively makes investment decisions with the aim of outperforming the market, managed funds are a form of active investing rather than passive investing, where funds track an index.
What happened with the Woodford Equity Income Fund?
Once a star manager, Neil Woodford, has featured in headlines in the past for delivering above-average returns for investors. However, over the last few weeks he’s been in the news for a very different reason; one of his flagship funds, the Woodford Equity Income Fund, issued a withdrawal suspension, locking in investors’ money.
The decision followed a period of underperformance of the fund, leading to a some investors choosing to withdraw their money. To protect the manager’s ability to run the fund, withdrawals were suspended. For investors, it means they are unable to access their investment in a poorly performing fund and are still paying fees. Initially, the suspension was for 28 days, though this has already been extended by a further 28 days and could last for months.
As with any investment decision, the Woodford Equity Income Fund isn’t an option that’s suitable for every investor. It’s invested in a number of smaller companies and has a greater portion of illiquid assets than alternatives, increasing the risk profile. For some investors, this is fine as part of a diversified investment portfolio. However, coverage of the suspension suggests that some investors had placed a significant chunk of their life savings into the fund without fully realising the level of investment volatility or risk they were exposed to.
The situation that investors of the Woodford Equity Fund now find themselves in highlights why it’s important to understand all investments and wider financial decisions.
Understanding your investments
So, when you’re investing via managed funds, what should you know about the investments?
Risk profile: The risk profile is a crucial factor when selecting which funds to place your money on. It should take into account your overall risk profile and the position of other investments you may hold. Generally speaking, the higher the level of risk the more volatility you should expect to experience, but the greater the potential returns will be.
Manager’s philosophy: Fund managers take a different approach to investing. This will somewhat be reflected in the risk profile, but it’s about more than just risk. This is the set of principles that will be made when making decisions and will link to the aims of the fund. This will help give you an idea of what to expect in terms of volatility, time frame to deliver returns, and eventual returns, though it’s important to note returns cannot be guaranteed.
Asset allocation: Do you know where your money is invested? Most fund managers will publish a list of their top holdings only, but you can see how the fund’s value is split between different assets. Again, this is linked to risk, as well as the manager’s philosophy. Taking a look at the asset allocation of a fund can help you see how it aligns with your wider financial plan and attitude to risk.
How positions change: Whilst you probably checked the above three points when selecting a fund, do you still do so? The position of funds can change over time, meaning what was once appropriate for you may no longer be. This has affected some of those invested in the Woodford fund, who found that Woodford’s original investment strategy to back large companies had shifted over time to focus on smaller companies, increasing the risk profile.
Historic returns: Historic returns shouldn’t be relied on when selecting a fund, but they are an important metric that should be considered. Looking at how a fund has performed over the long term allows you to see the returns when highs and lows have been smoothed out. Even when you’re invested, you should keep an eye on performance.
Fees: Understanding what fees you’ll pay to a fund is crucial for assessing if it delivers you value for your money. Usually, actively managed funds have higher fees than passive alternatives.
Whilst the events at the Woodford fund can be concerning, it’s important to look at your investment portfolio with a long-term view. A level of volatility over the short term should be expected depending on your risk profile and your overall financial plan should account for this.
Please note: The value of your investment can go down as well as up and you may not get back the full amount invested. Past performance is not a reliable indicator of future performance.