Woodford Concerns

MaxiRobriguez

itwasntme001 wrote: »

It certainly has been a great performance from the likes of fundsmith. Well done to those who have a good chunk of their portfolio with them! Out of the overall close to 7 figure amount i manage for my family, there is just over 20% invested in fundsmith and smithson. So sure i wish i had more (although i do also have other funds like lindsell train and a number of baillie funds which have also done very well) but i just dont think i can sleep at night having a massively concentrated close to 7 figure sum in one fund manager.


Fundsmith has a concentrated portfolio in defensive growth names in sectors such as healthcare and tech. Money has been piling into these sectors given the backdrop in weak economic fundamentals. What i am waiting to see is if we do get a large burst of growth in the global economy, would fundsmith outperform? Perhaps money will flow out of the defensive names and into more cyclicals which may mean an underperformance of fundsmith? I obviously do not wish this to happen but i am not blind to think it will never happen, perhaps even for long periods of time.



People also tend to confuse vol with risk. They are not the same thing. Fundsmith has been characterized as being relatively low vol which reflects the defensive nature against the slowing economic backdrop. However that is not to say that is lower risk then say a vanguard global fund. The big difference is that one relies on the fund manager to continue managing the portfolio well whereas the other has no requirement to do so. Woodford is perhaps the most extreme case of this risk being realized. We have no idea whether fundsmith will continue to outperform. It is an academic question how you would quantify this risk, but in any case the risk is clearly there.


So buying into fundsmith or any managed fund is investing in the fund management investment process. You are not investing only on the current holdings but also of all future decisions the fund makes, until you sell the fund. I personally made the decision to hold about 60% active (including some single stock holdings which have actually outperformed fundsmith) and the rest passive. Of the active funds i decided not to just hold one or two but a few that i took the view of being well run (mainly recent fund performance and their investment process).


Who knows how they will perform into the future but I am happy that i am not overly reliant on any one fund manager to outperform, especially since I am looking to hold for many decades.

Vol adds a risk for those people who like making, or need to make, decisions. A steady price is easy to ignore, one which is rapidly going up and down tends to induce such responses like "should I buy more now it's getting some traction" or "should I sell now its possibly overvalued" or "do I buy more now its dropped 10%" or "do I sell it all in case it tanks further" - all of these things distract from previously considered plans so unless you know you will ignore noise, volatility can results in sub-par choices being made.

Prism

itwasntme001 wrote: »

Fundsmith has a concentrated portfolio in defensive growth names in sectors such as healthcare and tech. Money has been piling into these sectors given the backdrop in weak economic fundamentals. What i am waiting to see is if we do get a large burst of growth in the global economy, would fundsmith outperform? Perhaps money will flow out of the defensive names and into more cyclicals which may mean an underperformance of fundsmith? I obviously do not wish this to happen but i am not blind to think it will never happen, perhaps even for long periods of time.

I agree that in a full blown economic surge (fuel, materials, finance, property etc) Fundsmith would not out perform like it has and would likely track around the index. I don't think it would all be bad news as the stocks are picked to do well in all conditions - but we shall have to wait to see. The key point is that Fundsmith (like Lindsell Train) is designed to be relatively defensive rather then all out growth. Its possible that some of those defensive stocks are too expensive and will fall just as heavily during a crash but others in the fund I think are still pretty reasonably priced (Pepsi, PM, Unilever, J&J)

People also tend to confuse vol with risk. They are not the same thing. Fundsmith has been characterized as being relatively low vol which reflects the defensive nature against the slowing economic backdrop. However that is not to say that is lower risk then say a vanguard global fund. The big difference is that one relies on the fund manager to continue managing the portfolio well whereas the other has no requirement to do so. Woodford is perhaps the most extreme case of this risk being realized. We have no idea whether fundsmith will continue to outperform. It is an academic question how you would quantify this risk, but in any case the risk is clearly there.

Volatility is certainly a risk and becoming more important to me at least as I get closer to possible withdrawal times. Its especially important during downturns or crashes. Its one of the easier risks to quantify. Other risks might include company failure which the limited holdings would make worse or the fund moving away from its principles (like Woodford). I have seen no sign of those last two yet.

So buying into fundsmith or any managed fund is investing in the fund management investment process. You are not investing only on the current holdings but also of all future decisions the fund makes, until you sell the fund. I personally made the decision to hold about 60% active (including some single stock holdings which have actually outperformed fundsmith) and the rest passive. Of the active funds i decided not to just hold one or two but a few that i took the view of being well run (mainly recent fund performance and their investment process).

Similar to me although I am pretty low on passive funds at the moment.

seacaitch

itwasntme001 wrote: »

i just dont think i can sleep at night having a massively concentrated close to 7 figure sum in one fund manager.

Speaking generally...

One way to approach these things is to behave as if you have a fiduciary duty to those relying or benefiting from the portfolio (even if this happens to be yourself...).

The intention would be to ensure that someone in the future reviewing your past investment decisions would be able to judge that you acted prudently.

In other words, use hindsight not to say "if I only I'd done this I'd have made X% more", but to confirm instead that you kept to a well constructed plan and avoided any reckless behaviour that could, if events had turned out differently, have proven very damaging.

ie. remembering that key to successful long term investing is avoiding making really big mistakes rather than always be aiming to shoot the lights out.

Moe_The_Bartender

Some very good points above. My investments in Fundsmith and Lindsell Train have put me in the very fortunate position where I no longer need to worry about growth and can focus on wealth preservation. They both continue to account for a significant chunk of my portfolio because I believe that the businesses in which they invest have great defensive qualities. If other funds begin to outperform them, it doesn’t mean that I would sell.

itwasntme001

If you look at arguably the greatest investor of all time, Warren Buffet, even he underperforms the market at times. He obviously has done very well over many decades compared to a broad US stock index (presumably his benchmark) but over the last 5 years he has pretty much matched the US stock market. Fundsmith only has 10 years of track record for his fund so it is very early to tell if he really is one of the greatest but he certainly has done very well compared to most fund managers in this relatively short history of fund performance.


The people who have done very well out of fundsmith are those looking to cash out soon i.e. retirees. Those who are buying his fund at a relatively young age and have many decades for it to grow will be the ones carrying a lot of risk in terms of the fund decisions. We obviously shall see what happens, but I would not be surprised to see fundsmith underperform at some point and quite significantly at that.

Moe_The_Bartender

itwasntme001 wrote: »

If you look at arguably the greatest investor of all time, Warren Buffet, even he underperforms the market at times. He obviously has done very well over many decades compared to a broad US stock index (presumably his benchmark) but over the last 5 years he has pretty much matched the US stock market.

The problem for Buffet is that his investment vehicle is so big that he is the market.

jaybeetoo

More bad news for Woodford https://www.bbc.co.uk/news/business-49445495

Eddie Stobart Shares suspended.

AnotherJoe

bowlhead99 wrote: »

'follow the philosophy' does not mean that if income is in the name of the fund, everything must produce a high level of income. The fund needs to produce income but it also needs to grow. Some holdings can yield 6%, others 3%, others 0%, in pursuit of the objective.

It needs to provide income, and that comes either from dividends, or growth and selling portions of that growth. Which is a fundamental problem with start ups or unlisted companies that might take 5 -10 years to come to fruition and be unsellable before then, which puts more load onto the listed side, an unfeasible amount of load, since even if half (say) is unlisted his dividend picks have to perform double what any other funds dividend picks will do.

BTW, I see another of his picks has come off the rails this morning.
https://www.telegraph.co.uk/business/2019/08/23/fresh-blow-neil-woodford-eddie-stobarts-listing-suspended/. :eek::eek:

Oh and icing on the cake, Industrial Heat has been "marked down" as well, a travesty since it hasn't been marked to zero, though thats all they will get for it in the end, unless the office furniture and PC's is worth something or they own some offices? I guess it would be too embarrassing for Link to write it all off in one go. If Link can value any amount of IH as worth £70M I'd count their other valuations as valueless.

Neil if its really worth £70M, for gods sake
Get Out Now

edgex

Malthusian wrote: »

If Woodford was doing something dodgy, e.g. getting kickbacks into an offshore account from the scam companies he invests in, that would merit action from the regulators. However there is absolutely no evidence that Woodford is doing anything like that, and more importantly no reason he would want to do that, unless it turns out that he was hundreds of million pounds in gambling debt to the mob.

In the absence of a debt to the mob, Woodford already had enough money to afford his current lifestyle forever when he launched Woodford IM. Which is why he stopped trying to make money for investors and started to indulge in non-existent grandiose concepts like "patient capital".

Woodford being gulled by scam companies because he is halfway to his yacht, lazy, and motivated by a self-righteous desire to "support fledgling British business" rather than make money for his investors, is not dodgy and does not merit action by the FCA. (Other than writing a few "lessons must be learned" reports to occupy some bureaucrats and keep the public happy.) That is just bog-standard, 100% compliant fund manager incompetence.

Investing in a 'property' company that appears to have done nothing but make a website...
Investing in wack job 'science' that he could have googled...
Arranging weird Guernsey stock market listings...

Most incompetence is the failure to do something. All of the above, & more, are actual actions.

Prism

Interesting read here

https://www.reuters.com/article/us-woodford-inv-suspension-advisers/woodford-struggles-to-build-bridges-with-uk-financial-advisers-idUSKCN1VD14Z?il=0

What I find surprising is that IFAs (5 in this example) would even considering putting their clients money in an obviously high risk small cap income fund that was kicked out of the income sector for not actually producing enough income. Exactly which gap was it supposed to fill.