Diversity and formal investment advice

Diversity and formal investment advice

The press is currently aglow with stories about the Woodford investment funds that are currently suspended with the impact felt primarily by private investors. For an overview of the situation the Daily Mail has an article here and for the impact on private investors, the BBC have a piece here.

As independent financial advisers, we have no clients exposed to the Woodford funds as they did not meet the criteria to pass the initial screening used by our discretionary fund manager partner. (Previously, Neil Woodford was an employee of Invesco Perpetual Investments, it was not Woodford’s name on the door. His previous track record as a manager was very positive, but that track record may have reflected his sole focus on fund management only).

Generally, investment management is very difficult in the long term. Current investment theory suggests that over the long-term, managers will find it a near impossibility to beat the market consistently. Although “star managers” do exist from time to time, to concentrate your investment holdings with any specific manager is to ignore the value of diversity in reducing the impact of unhelpful events.

A private investor’s investment diversity needs to be wider than you might expect; holding each share represented in the FTSE100 is not a diversified portfolio, but in essence a tracker fund based around UK “Large Cap” shares! Portfolios used by ourselves are normally a diverse mix of gilts, corporate bonds and exposure to US, UK and other international developed markets. These portfolios are not chasing outright returns, but looking to preserve value as well, by managing volatility within pre-selected parameters. This approach necessitates a sacrifice of overall returns but will reduce the likelihood of nightmare losses; a trade-off we believe to be important to our clients.  

The press are also raising the issues relating to the recent Woodford fund suspensions, initially for 28 days but depending on events they could be longer. Fund suspensions are not unknown in the wider market; many property funds were suspended when the Brexit vote was originally held, as property funds were impacted by very large withdrawals. It can take a long time to turn a shopping centre into liquid cash. For Mr Woodford the issue is a need to liquidate unquoted and small cap shares, without depressing their values further.  Investors should always consider the impact of concentrating their investments with specific managers, sectors or asset types as any sale triggered by external events will be the one most likely to generate a real loss.

The nature of investment is that returns and losses are unpredictable; although a fund manager may make conviction, contrarian, safe bets or hunch based calls, a private investor needs to concentrate on their own cash needs on a day to day basis. A spread of cash, gilts, bonds and equity is the key to sleeping easily at night.

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About Martin-Redman Partners   

We are a team of experienced Financial Advisers who can advise on your personal or business financial arrangements. We have been building trusted relationships with clients for many years by articulating clear and tailored recommendations in areas ranging from investments to retirement planning, to complex estate planning advice.  

The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.