What’s in a Name?
Few stories in investing have been sadder than the dramatic downfall of investment manager Neil Woodford, the one-time superstar who has now been forced to prevent his disillusioned followers from withdrawing cash from his flagship fund. One hopes that he has learnt some brutal lessons. Investors should also learn from his story.
Firstly, there are risks in trusting your savings to a third party, whose ideas may be different from yours. This risk is less with an investment trust, where you can always get out because you can sell in the market, than for open-ended investment companies such as unit trusts, where the manager has to sell some holdings if too many people want to redeem their investments. Fire sales, as so many asset holders have discovered, are a recipe for losing money.
Unit trusts have traditionally been the preferred route for less experienced private investors. In my view, this is a mistake. Investment trusts are more suitable.
Secondly, investing through funds can be expensive. Woodford charges between 0.5% and 0.75% and it is particularly galling for those who want out but are forced to continue paying against their will. You may also have to pay a fee to an investment platform. Managers may be inclined to churn investments, adding to costs.
Thirdly, you cannot feel confident that today’s star manager won’t be tomorrow’s dud, as has happened with Woodford. Funds tend to invest in specific sectors or geographic regions and are thus vulnerable to downturns in their area of expertise. The whole idea of funds is to spread investments at a stroke. It goes against the grain to find yourself trapped in a narrow rut.
Woodford’s speciality was picking contrarian stocks. That’s fine when the market is proved wrong and the shares bounce back strongly; it’s a disaster when the market is spot on and the shares slump further. Cheap shares can be a bargain but they may be cheap for a good reason.
The most important lesson of all, though, is that over time the professionals may be little or no better than you. Back your judgement and pick your own stocks.
A Call to Arms
I’m not an ethical investor, since you can object to most companies for one reason or another and you are not actually putting money into the company when you buy shares unless it is an IPO or a rights issue. However, I have avoided arms companies despite some great buying opportunities – until this week, when I held my nose and snapped up a modest stake in Chemring (CHG).
The shares have been on the slide since last August, when they stood at 236p, and they have been as low as 138p. Figures for the year to the end of October were blighted by an explosion at the Salisbury pyrotechnics plant. This year’s first half was boosted by a £13 million insurance payout.
Stripping out the distortions puts pre-tax profits up 16% to £9.9 million on revenue 5% ahead. The interim dividend edges up from 1.1p to 1.2p. Salisbury will be back to full production by the end of the year.
The shares initially slipped on the figures, which I felt was wrong, so I searched through the announcement to see if I had missed something. That delay cost me a few pence a share, as the price bounced back, but that is better than rushing in and regretting a rash purchase.
Chemring currently stands at about 156p, giving a prospective yield of 2.3%. The shares may mark time for a while but I think they will start to move upwards if there is nothing untoward in the next trading update.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar
