Another nail in the coffin for active investing – Neil Woodford makes the headlines

If you read the financial press, this is big news. ‘Star fund manager’, Neil Woodford, stopped investors withdrawing money out of his Woodford Equity Income Fund on 4th June, after the sum total of investment withdrawn from the fund reached a staggering £560m in less than four weeks. Kent County Council wanted to withdraw a further £263m, but was unable to do so before trading halted.

Investment analysts have attributed this action to the significant poor performance of the fund over recent months. Neil Woodford was once the darling fund manager who could do no wrong. A few years ago he was riding high when he left his employer, Invesco Perpetual, to set up his own company, Woodford Funds. With a reputation for having the midas touch, he’d built a large following among both retail and institutional investors, many of whom followed him to his new venture.

Picture from Woodford Investment Management Ltd.

Neil Woodford is an active fund manager, using his knowledge, experience and intuition to buy and sell stocks that will outperform and provide investors with beneficial returns. The challenge with this comes on a number of levels and no one is going to get it right all the time.

A 2016 study by S&P Dow Jones Indices indicated that about 90 per cent of active stock managers failed to beat their index targets. In addition, studies have shown that if an active manager outperforms the market over a 12 month period, they are less likely to do so over the following year. It doesn’t paint a very positive picture.

Because active investing means paying fund managers and research teams, as well as increased costs of buying and selling stocks, these costs have a detrimental impact on the overall return that can be delivered.

The shift to passive investing

The idea behind passive investing is that markets are generally efficient. Trying to time the markets by actively selecting when to buy and sell or picking individual stocks that will outperform, is at best difficult to achieve, and at worst a foolish game.

We believe that it’s difficult to out-think the market, so the focus is to track the market and sector performance as efficiently as possible. We want to avoid the fees and performance risks that occur with frequent trading, with the aim of delivering investment returns over time in line with an individual client’s risk profile.

Passive investing is not new – they were introduced in the 1970s, seen as an easier way to achieve returns in line with the market. Skip over 40 years later to 2015, and the amount of money invested in computer run index trackers in the UK broke through the £100bn mark for the first time. There is currently a considerable shift towards passive investing and away from active and Mr Woodford is only demonstrating why that’s the case.

If you’ve any questions about our approach to investing money don’t hesitate to get in touch.