10 ways to check you’re happy with your investment funds
The news of Neil Woodford suspending withdrawals from his flagship fund has dominated the media. But what can investors learn from the situation to help hone their portfolios?
Investors trapped in the Woodford fund are understandably concerned about their money. While there’s nothing they can currently do about that money, they can use some lessons from the situation to check that the rest of their portfolio is ship-shape.
Here are 10 questions to ask yourself about your funds:
1 – How liquid are my funds?
A big issue for Woodford was that he had built up a large proportion of the fund in smaller companies, which are more illiquid, meaning they are harder to sell quickly.
You need to understand how liquid the funds are that you own, and accept that if you want exposure to illiquid assets, you may not be able to get your money when you want it. As Woodford has shown, just because a fund says it offers daily dealing, it doesn’t mean itxalways will.
2 – Has the fund got too big?
Be wary of funds that have accumulated masses of assets.
There’s no hard and fast rule on the appropriate size of a fund, as it depends on what it’s investing in. A fund invested in FTSE 100 companies can amass more assets than one investing in micro-sized UK start-ups.
Woodford Equity Income Fund (BLRZQ73) peaked at over £10bn, which doesn’t look to have been appropriate considering his focus on smaller companies.
While it is always tempting to follow other investors into big funds, be careful and try to understand whether this size may actually be detrimental to long-term performance or liquidity.
3 – Has the fund been a victim of investment drift?
Most managers are good at sticking to a well-defined investment approach that sees them invest in a particular type of company. And this is why investors buy into a fund – to access that fund manager’s expertise and experience.
However, managers sometimes drift away from what they’re good at and start investing in companies away from their core competence.
This can be a fund manager moving from investing in large companies into smaller ones, or it can be a manager changing their style of investing (typically because theirs is out of favour). This ultimately changes the fund into something different to what most investors originally thought they were buying.
4 – Are too few investors controlling the fund?
It’s important to be wary when a few investors control a large proportion of fund assets. If someone owns a large chunk of the fund and then decides to sell it can cause serious problems for the fund manager, particularly if they are investing in more illiquid assets.
It is always worth finding out what proportion of the fund the top five investors own – you can ask the asset manager for this information or find it in the annual report and accounts.
5 – Have you just followed a ‘star’?
No fund manager has the secret recipe to outperforming the market in all conditions and you should expect everyone at some point to have a period of bad performance when their investing style or process is out of favour. If someone has a good long-term track record, don’t just assume it will continue.
6 – Do you understand the fund manager’s style?
It’s vital to understand how a manager invests before you give them any cash, as it can be very painful to learn with your own money. Careful due diligence is rarely wasted.
Things you should make sure you know are: in what market conditions will they do well or badly, what type of companies do they invest in, and how many different holdings do they usually have? This will help you to determine whether the fund performance is in line with your expectations or not.
7 – Have you looked beyond the fund name?
Just because two funds say they invest in UK equities doesn’t mean they have the same risk or indeed can be compared.
Both may sit in the same sector but you could be comparing apples with pears. For example, a fund investing in large well-known UK companies can be very different to a fund investing in small and medium-sized UK companies. You should look beneath the bonnet, and beyond the fund name, to understand what it’s investing in.
8 – Have you spread your eggs across different baskets?
You don’t want to put all your eggs in one basket, so make sure that one fund manager isn’t running too much of your overall investment portfolio.
You should go through your investments and check that you have a good spread across different funds or regions, and re-balance your portfolio each year so you don’t end up too concentrated.
9 – Have you just followed the herd?
A worrying number of people invest in funds because their friend has done so or someone told them they made a lot of money from the manager – but you should always do your own research.
The same goes for following investment platforms’ best buy lists – you should use them as a guide or a starting point, but make sure you do your own research so you understand the fund, how it invests and why you’re buying it.
10 – Have you checked cross holdings?
If a manager is running more than one fund, how many of the stocks are held across both funds?
If a manager has to sell in one portfolio, it may cause the price to fall in the other. Therefore, look not just at the fund you are interested in, but other funds run by the same manager.
You should also make sure that you don’t have too much doubling up in your investment portfolio – for example, you don’t want to own four funds that all have the same company in their top 10 holdings.