31st January 2013
Sanlam publishes one of the best known lists in the UK investment world, the White list, that seeks to identify the best, worst and in between performers among UK income funds. They use their White List to put together a composite Income fund Isa.
They have now relegated one of the UK’s best known and indeed arguably one of the UK's best fund managers Invesco Perpetual’s Neil Woodford to its grey hued ‘in-betweener’ list and suggested investors consider selling.
Undoubtedly these lists have their uses. No-one invests money with a fund manager in the hope of seeing them proceed to lose some of it or even to lag their peers. With an income fund, investors should expect decent returns along with an income certainly over a medium term time scale. Serial offenders on performance should be held up as examples.
However while these lists are generally what we call ‘a good thing’ they also have their weaknesses.
They are intended to shake up the investment scene but also to prompt investors to action. They are issued by brokerages which operate on an execution-only basis i.e. without full financial advice though some of these businesses including Sanlam also have advice arms. As such, they serve an important segment of investors, but they also need to send out bold messages to get people’s attention. These lists are, at least partly marketing for the businesses that issue them.
That is a mixed blessing. Sometimes investors should sell out of a badly performing fund, but sometimes they should stick with it, depending on their time horizon and whether a fund manager’s process is doing badly because of market conditions and will come good again.
All these lists incorporate this into their research as Sanlam's methodology demonstrates, and yet at Mindful Money we still think there is a risk that the message loses some of its subtlety.
Here is part of the note from Sanlam. It says: “Woodford’s funds have a long established negative view on the economy and have selected defensive holdings that can ride out a period of low growth. This, and the assets under management, has led the portfolios to become very focused in many of the very large stocks in the market.
“We would prefer managers who are able to be more pragmatic in the face of swiftly changing circumstances and therefore place sell recommendations here.”
Now of course, investors are always being told that they should invest for at least the medium and perhaps even for the long term. The reality is that they don’t always do so. For good or ill, many people switch funds and adjust asset allocations with reasonable frequency. To a greater or lesser extent, people are timing markets, or at least timing investment styles and/or approaches when they switch funds.
But reading between the Sanlam lines, the firm appears to be saying that medium term investors are shortening their investment horizons especially given this ‘risk on/risk off’ market and that is why they don’t like the Woodford defensive, large cap bias.
That is their view. But before any investors embrace it, we think they need to consider what sort of investor they are.
If you have a mainly advised portfolio, you can use it to challenge your adviser, though we hope they will be able to justify their approach to asset allocation and fund selection.
You may wish to consider the White List Isa, a blend of the income funds that they do like.
More importantly, if you are mostly self directed, and have had some doubts sewn in your mind about Mr Woodford, we suggest that you first consider just how long your time horizon is, just how
much short term underperformance you will tolerate and exactly what you are investing for in the first place.
We certainly think you should think long and hard before dropping what may be the UK's best fund manager, because someone dropped him off their list.