Does Woodford's failure have implications for other widely owned funds?

bostonerimus

So it looks like all the air is now out of the Woodford bubble.

https://www.theguardian.com/business/2019/oct/15/neil-woodford-equity-income-fund-wound-up

There will be the usual recriminations and wailing in the media and from investors, but it really is a case of "buyer beware" as all the information was there to evaluate the funds.

So does this failure have anything to say about other popular funds from the likes of Fundsmith and Lindsell Train? Fundsmith has different investment criteria, but also has a small number of holdings and depends on stock picking and of course there's the hype around the managers because they are "winners". Do these highly focused funds make up too larger allocation in many portfolios and are we ignoring dangers similar to the Woodford funds because they have done so well lately?

talexuser

The only thing I can see as a downside is the huge size, which may limit growth in the future (but they said the same about Woodford at Invesco when his funds reached 2 bil, 3bil, 5 bil and still upwards and he continued to outperform). The holdings are quite different to Woodford, and should be able to be sold more easily, so the liquidity issue should not be such a problem. And Train has actually said don't buy my IT at such a ridiculous premium.
As soon as Woodford flatlined and dropped the warning signs were there, if Train and Smith started the same trend then decisions need to be made.
I think Woodford assumed his investors would stay with him for much longer, perhaps falling for his own hype, or just being solidly contrarian to his principles. With hindsight some of the shares turned out to be real dogs. Ironically he was in the camp that Brexit was fine and would not harm his positions and it would come good in the end. That's turned out well.

talexuser

Interestingly I just read the Trustnet latest Adviser research figures with Lifestrategy 60/40/80 , Linsell Train and Fundsmith right at the top of the list. At first I thought how odd, the opposite of investing style. But perhaps it makes sense to have your main funds in a tracker and have some side bets in one or other of the "flavour of the years" (rather then months).

Thrugelmir

bostonerimus wrote: »

So does this failure have anything to say about other popular funds from the likes of Fundsmith and Lindsell Train? Fundsmith has different investment criteria, but also has a small number of holdings and depends on stock picking and of course there's the hype around the managers because they are "winners".

One day the holdings held (overall) may fail to deliver. No fault of the managers themselves. That's the nature of investing. Running a £7bn open ended fund doesn't come without it's challenges of liquidity. When the value of individual holdings runs into the hundreds of millions.

Linton

Both Lindsell Train Global Equity and Fndsmith are very much large company funds. Woodfords problem was that he could not sell his small company investments fast enough as he held a relatively high % of their total equity. I cant see the same thing happening to funds based on Pepsico, Unilever, Microsoft etc etc. Any one of these has a much larger market cap than either of the funds.

seacaitch

Prompted by Woodford's antics, Lindsell Train published a note on liquidity a few months back, which I commented on here:

https://forums.moneysavingexpert.com/discussion/comment/75895424#Comment_75895424


LT has a guideline "not to own more than 15% of the votes of any company we own"

& wrote in that liquidity note:

"Looking again at the sixteen 5% or larger positions, it is true that most of them could take a significant time to liquidate. On the assumption that we only traded 20% of the previous six months average volume, ten of those positions would take more than six months to sell out of completely. "

So, >6 months in normal market conditions to exit ten of the positions, following their assumption.

In circumstances of company-specific stress, I can imagine that LT could become trapped in positions for much longer than they might wish to be; in circumstances of significant market-stress, where LT might one day face mass redemptions from frightened punters, I can imagine how LT might be unable to offer daily liquidity (ie. gating).

As such, I think LT are complacent. They are themselves patient very long term investors, and the strategy is tailored to that, but I'd be very surprised if a good chunk of their investors are NOT of that mindset and would (will) run for the hills given the right trigger, causing LT problems.

bostonerimus

Linton wrote: »

Both Lindsell Train Global Equity and Fndsmith are very much large company funds. Woodfords problem was that he could not sell his small company investments fast enough as he held a relatively high % of their total equity. I cant see the same thing happening to funds based on Pepsico, Unilever, Microsoft etc etc. Any one of these has a much larger market cap than either of the funds.

Yes if you want a Large Cap Value fund and understand that you are investing in maybe 30 stocks then they would be good in a portfolio. However, I worry that the promoting of such funds by the finance industry and the inexperience of investors could mean that they are over used in portfolios.

Thrugelmir

Linton wrote: »

Both Lindsell Train Global Equity and Fndsmith are very much large company funds. Woodfords problem was that he could not sell his small company investments fast enough as he held a relatively high % of their total equity. I cant see the same thing happening to funds based on Pepsico, Unilever, Microsoft etc etc. Any one of these has a much larger market cap than either of the funds.

LT hold around £690 million of Unilever stock in their UK Equity fund as well. The same issue that Woodford had with holdings mirrored throughout different funds. If Unilever were to issue a succession of profit warnings and the price were to start to slide. Offloading would only accentuate the situation.

itwasntme001

seacaitch wrote: »

Prompted by Woodford's antics, Lindsell Train published a note on liquidity a few months back, which I commented on here:

https://forums.moneysavingexpert.com/discussion/comment/75895424#Comment_75895424


LT has a guideline "not to own more than 15% of the votes of any company we own"

& wrote in that liquidity note:



So, >6 months in normal market conditions to exit ten of the positions, following their assumption.

In circumstances of company-specific stress, I can imagine that LT could become trapped in positions for much longer than they might wish to be; in circumstances of significant market-stress, where LT might one day face mass redemptions from frightened punters, I can imagine how LT might be unable to offer daily liquidity (ie. gating).

As such, I think LT are complacent. They are themselves patient very long term investors, and the strategy is tailored to that, but I'd be very surprised if a good chunk of their investors are NOT of that mindset and would (will) run for the hills given the right trigger, causing LT problems.

Wouldn't a similar situation happen for Vanguard? They are huge and if suddenly everyone runs for the exits and starts liquidating their passive vanguard funds, wouldn't vanguard take a long time to meet redemptions without moving the market by their liquidations under normal market conditions? Of course this scenario would not happen under normal market conditions but in stressed conditions, making it a lot worse.

Thrugelmir

itwasntme001 wrote: »

Wouldn't a similar situation happen for Vanguard? They are huge and if suddenly everyone runs for the exits and starts liquidating their passive vanguard funds, wouldn't vanguard take a long time to meet redemptions without moving the market by their liquidations under normal market conditions? Of course this scenario would not happen under normal market conditions but in stressed conditions, making it a lot worse.

We will find out when markets return to more volatile conditions. Been benign for so long. Many investors believe that current markets are the norm. In due course there'll be another crisis. Corporate debt being one issue at the top of the agenda at the moment. US companies taking the lead in borrowing money to buy back their shares. May help executives meet their EPS bonus targets. Longer term the jury is out as to whether there'll be real benefit for other shareholders.

itwasntme001

Thrugelmir wrote: »

We will find out when markets return to more volatile conditions. Been benign for so long. Many investors believe that current markets are the norm. In due course there'll be another crisis. Corporate debt being one issue at the top of the agenda at the moment. US companies taking the lead in borrowing money to buy back their shares. May help executives meet their EPS bonus targets. Longer term the jury is out as to whether there'll be real benefit for other shareholders.

Agree. Not at all clear what the catalysts are for the next leg higher in stocks and lot of headwinds are appearing. Perhaps a sign of a resumption of decent growth would signal a bottom in stocks. But no one knows for sure.


On the flip side where else is one to put their cash? Perhaps cash is the place to be for the next few years.