Woodford anyone?

[anonymous-user]

If you look at the GAM funds debacle of last year there was a significant recovery after a fall from grace. I think it will be trickier for Woodford because of the superstar manager status provided part of the fund's value and that has evaporated.

This is one of the risks of holding funds. What I consider "fashion" risk.

Note that when investors want "out" from a fund on a large scale the fund becomes a forced seller of investments. Buyers can see the big forced seller trying to sell and will bid low. This issue was mentioned earlier in the thread.

In contrast, an ETF doesn't become a forced seller although it's own share price will take a pounding. In other words, people are never completely unable to get out of an ETF although their panic will hurt them on selling price.

All of this brings home two of the absolute investment basics,

• Spread your risks, and
• Don't panic.

The point being that if your risks are well spread you shouldn't need to panic when there's a wobble.

[DonkeyApple]

I’m not sure that is correct. The mechanism of an ETF doesn’t prevent liquidity issues. The AI creates and kills units in response to demand and supply and this is typically in a ‘streaming’ manner although Indont believe this has to be the case and an AI can in essence run its on book and deal with excess flow as collected block trades. But, if an ETF saw outflows that were large enough to exceed the NMS of the underlying assets then it would have the exact same issue as the Woodford fund has seen?

[anonymous-user]

What is interesting in the context of "panic risk" is the fundamental difference between theory and practice. You may theoretically be able to trade in an instant but if everyone tries to do it at the same time there are no guarantees of the system working.

Its a bit like what can happen at big sporting events where your phone shows a good signal but you can't get any service - because everybody else is on the phone.

[anonymous-user]

In response DAs point what I was trying to illustrate is that the risk on a wobbling fund behaves, from the investor's point of view, as one big thing whereas on a wobbling ETF the different aspects of risk behave separately. You shouldn't get stuck in an ETF but may be cut to ribbons on price.

[DonkeyApple]

rockin said:

What is interesting in the context of "panic risk" is the fundamental difference between theory and practice. You may theoretically be able to trade in an instant but if everyone tries to do it at the same time there are no guarantees of the system working.

Its a bit like what can happen at big sporting events where your phone shows a good signal but you can't get any service - because everybody else is on the phone.

Indeed. In my side of the industry which is basically CFDs, concentration risk is something we focus on very strongly and factor in to all activity, other areas of the market probably rarely give it too much of a thought although it may still be there.

[DonkeyApple]

rockin said:

In response DAs point what I was trying to illustrate is that the risk on a wobbling fund behaves, from the investor's point of view, as one big thing whereas on a wobbling ETF the different aspects of risk behave separately. You shouldn't get stuck in an ETF but may be cut to ribbons on price.

But in that instance wouldn’t getting locked in be much better potentially as the purpose of halting trading is to protect the value of the remaining assets and to conduct an orderly sale, whereas an ETF would keep dumping and potentially drive the values of the holdings down to next to nothing? And I’m pretty sure that you could suspend trading in an ETF anyway if needed?

I ‘think’ the only mechanical difference is that the ETF holds listed assets and can’t hold off exchange investments?

[CaptainSlow]

rockin said:

All of this brings home two of the absolute investment basics,

• Spread your risks, and
• Don't panic.

The point being that if your risks are well spread you shouldn't need to panic when there's a wobble.

The first investment basic is that you don't "spread your risk".

[PhilboSE]

Condi said:

then its simply a case of investors not understanding what they were investing in, or Woodford's strategy not paying off in the current market, or more likely a combination of both.

Slightly unfair - the shape of the fund changed considerably over time as Woodford got more wrapped up in unlisted equities and his own hubris. Investors who bought into the "FTSE100 yielding stocks" strategy at launch can't be held entirely responsible for not monitoring the fact that Woodford went massively off piste over time.

Condi said:

There are 1001 worse performing funds than this one, and yet nobody is asking the FCA to investigate them.

Actually, in its sector, there are zero worse performing funds than Woodford,

[Condi]

PhilboSE said:

Condi said:

then its simply a case of investors not understanding what they were investing in, or Woodford's strategy not paying off in the current market, or more likely a combination of both.

Slightly unfair - the shape of the fund changed considerably over time as Woodford got more wrapped up in unlisted equities and his own hubris. Investors who bought into the "FTSE100 yielding stocks" strategy at launch can't be held entirely responsible for not monitoring the fact that Woodford went massively off piste over time.

Condi said:

There are 1001 worse performing funds than this one, and yet nobody is asking the FCA to investigate them.

Actually, in its sector, there are zero worse performing funds than Woodford,

1) True, although until only 12 months ago his fund was comfortably out-performing the FTSE. And the vast majority of his shareholding is still in UK listed companies.

2) Also true, but there are many many more sectors with poorly performing funds. It sets (IMO) a bad precedent that the FCA are being asked to be involved and a big fuss is created just because it was a large retail customer base.

[PhilboSE]

DonkeyApple said:

There is also another aspect to this that may be worth contemplating and that is that this Woodford fund is the first ‘victim’ of the gamifying of the retail investment industry?

Over the years I’ve mentioned this a few times that as the investment side of the market rapidly expands its self selection business that the risk is that the nature of this side of the business is much less ‘stickiness’ or the potentially very bad side effect of investors unwittingly yet naturally turning themselves into traders and decimating their long term performance.

In the light of the expanding self execution side of investing the firms that cater for this have tried to attract clients with mobile trading apps, free data and discounted costs and all of this risks investors over trading as it massively increases the likelihood of a client exiting a position during a drawdown event as they are bombarded daily with the price action data compared to previously when investors might look at their investments once a year. The key in this regard is, as per usual, finding the balance.

But the other thing to come out of the growth of self execution is the massive increase in the creation and promotion of the star investor. It’s the creating of a brand to market to clients to convince them to buy that fund over another.

It’s a new phenomena. We’ve always had ‘ star investors’ but they weren’t promoted in the same way to retail investors as it wasn’t the retail investors who were making the investment decisions. They were promoted to the IFAs etc. 20 years ago few investors would know the names of fund managers off the top of their head. Today, retail investors can reel off a string of brands.

Combining this new commoditisation of fund managers to attract retail investors with the gamifying of the investment industry and I wonder if what we might also be seeing with this Woodford fund is the fact that they have a higher risk than weaker brands to terminal exodus of funds regardless of the intrinsic structure of that fund?

Interesting stuff, however there's an implication in the text that IFAs were somehow immune to this. The "star investors" were marketed to IFAs, and IFAs marketed them to their clients. These days is just the middleman (and his 1%) that has been cut out.

I think the "star manager" bit is also being a bit overplayed - how many actual household names are there really? Neil Woodford and Terry Smith I'd suggest, maybe Anthony Bolton for those with long memories. Then you're into the eponymous funds but how many "normal" investors know Lindsell and Train's first names?

In any event, when I had an IFA and he was pimping a fund to me, he would always begin by telling me (a) that he'd been to a seminar held by that person recently, and that (b) he would recommend the fund on the basis of the manager.

So it's not really a new thing, just B2C now rather than B2B. My experience of IFAs is that they were just as starstruck.

[PhilboSE]

Condi said:

2) Also true, but there are many many more sectors with poorly performing funds. It sets (IMO) a bad precedent that the FCA are being asked to be involved and a big fuss is created just because it was a large retail customer base.

I agree that a poorly performing fund isn't of itself a case for the FCA. However, Woodford did change the shape of the fund considerably and the horse trading against his other funds and the Channel Island listings as smoke and mirrors for compliance certainly needs looking at.

I think that the FCA is involved not "just because it was a large retail base" but also because there may be some compliance issues.

[anonymous-user]

CaptainSlow said:

The first investment basic is that you don't "spread your risk".

Well there's a thing. Perhaps you'll add a bit more detail so we can benefit from your guidance?

[CaptainSlow]

rockin said:

CaptainSlow said:

The first investment basic is that you don't "spread your risk".

Well there's a thing. Perhaps you'll add a bit more detail so we can benefit from your guidance?

You diversify to reduce risk.

[DonkeyApple]

CaptainSlow said:

rockin said:

CaptainSlow said:

The first investment basic is that you don't "spread your risk".

Well there's a thing. Perhaps you'll add a bit more detail so we can benefit from your guidance?

You diversify to reduce risk.

Ok. That’s me confused. Coffee hasn’t kicked in but I’m not yet seeing what’s different between what you are saying v what rockin said other than letters?

[BoRED S2upid]

DonkeyApple said:

CaptainSlow said:

rockin said:

CaptainSlow said:

The first investment basic is that you don't "spread your risk".

Well there's a thing. Perhaps you'll add a bit more detail so we can benefit from your guidance?

You diversify to reduce risk.

Ok. That’s me confused. Coffee hasn’t kicked in but I’m not yet seeing what’s different between what you are saying v what rockin said other than letters?

Pedantry. That’s the only difference.

[CaptainSlow]

BoRED S2upid said:

DonkeyApple said:

CaptainSlow said:

rockin said:

CaptainSlow said:

The first investment basic is that you don't "spread your risk".

Well there's a thing. Perhaps you'll add a bit more detail so we can benefit from your guidance?

You diversify to reduce risk.

Ok. That’s me confused. Coffee hasn’t kicked in but I’m not yet seeing what’s different between what you are saying v what rockin said other than letters?

Pedantry. That’s the only difference.

It may seem like pedantry to the uninformed but it certainly isn't.

Anyone writing the term "spreading risk" beyond the first week of an undergrad course would get their paper torn up and considered a lost cause.

You diversify to reduce risk..."spreading" risk means you end up with the same amount of risk...just spread...which is incorrect.

[DonkeyApple]

CaptainSlow said:

It may seem like pedantry to the uninformed but it certainly isn't.

Anyone writing the term "spreading risk" beyond the first week of an undergrad course would get their paper torn up and considered a lost cause.

You diversify to reduce risk..."spreading" risk means you end up with the same amount of risk...just spread...which is incorrect.

If we are taking the two words to mean two different actions (which I believe rockin was but rather logically using one of either of the terms to imply the same meaning) It wouldn’t be the same level of risk as you’ve reduced concentration risk.

When constructing an investment portfolio you begin with setting the level of risk that which to run. You can achieve this by running lower risk investments and diversify with higher risk investments to achieve the overall desired risk profile or you could use multiple investments that match the desired risk profile, limiting the concentration risk with a suitable spread of investments.

In the context of PH I would consider it the norm to use either word to cover either action. And in general I don’t think diversification strictly means spreading the investment pool over a range of differing risk profiles but simply the act of not running concentration risk whether that be a product or market. In other words, the same as ‘spreading’ in this context.

[walm]

CaptainSlow said:

It may seem like pedantry to the uninformed but it certainly isn't.

Anyone writing the term "spreading risk" beyond the first week of an undergrad course would get their paper torn up and considered a lost cause.

You diversify to reduce risk..."spreading" risk means you end up with the same amount of risk...just spread...which is incorrect.

So pedantry, then.
We all knew what he meant.

[CaptainSlow]

walm said:

CaptainSlow said:

It may seem like pedantry to the uninformed but it certainly isn't.

Anyone writing the term "spreading risk" beyond the first week of an undergrad course would get their paper torn up and considered a lost cause.

You diversify to reduce risk..."spreading" risk means you end up with the same amount of risk...just spread...which is incorrect.

So pedantry, then.
We all knew what he meant.

We indeed all knew what he meant, but it was still incorrect that isn't pedantic to correct. Especially when described as an "investment basic".

[walm]

CaptainSlow said:

walm said:

CaptainSlow said:

It may seem like pedantry to the uninformed but it certainly isn't.

Anyone writing the term "spreading risk" beyond the first week of an undergrad course would get their paper torn up and considered a lost cause.

You diversify to reduce risk..."spreading" risk means you end up with the same amount of risk...just spread...which is incorrect.

So pedantry, then.
We all knew what he meant.

We indeed all knew what he meant, but it was still incorrect that isn't pedantic to correct. Especially when described as an "investment basic".

Not to be pedantic but I am not sure you know what pedantic means...

I grasped the wrong end of the stick on this thread a couple of times and was quite rightly corrected...
Correcting someone who everyone understands and agrees with is literally the definition of pedantic!!