Published: August 2019 (5 Min Read)

The dramatic fall from grace suffered by Neil Woodford recently holds cautionary lessons for all investors, professional and amateur alike.

First, illiquid assets, such as property, infrastructure and unlisted companies should be bought by retail investors only through closed-ended vehicles, such as investment trusts or real estate investment trusts (REITs). Open-ended vehicles, such as unit trusts, suffer redemptions when markets or managers come under stress, and thus may have to raise substantial amounts of cash quickly. To achieve this they should own only liquid assets.

Second, only support managers who “stick to their knitting”. Managers earn their reputations by investing in specific niches. Those who use the strength of their reputations to invest in other ways should be considered with scepticism. We should always ask whether they have lost their sense of humility. The best managers invariably never lose that understanding.

Third, when a manager leaves an established firm to set up their own boutique there can be good and bad reasons for doing so. Large firms often pressurise their top managers to manage more money than the manager believes is appropriate. Leaving to escape that pressure can be a good call, but one needs to understand whether they will become less effective when they give up the support on which they may have previously relied.

If however they are leaving to escape some of the controls of the large firm, or to earn more money than the large amounts they already earn, then beware!

Finally, be wary of managers whose funds invest in each other, or in the same underlying holdings as each other. Such situations can, but don’t always, cause conflicts of interest, which may then risk compromising the manager.

GBIM has for a long time held exposure to infrastructure and property, and a small amount of unquoted companies. It is all held through specialist investment trusts or funds which invest in such assets through the stock market. We set great store by knowing the managers well and so have regular meetings with them.