As you may have seen in the press, investments in the Woodford Equity Income Fund have been ‘gated’1. This means that investors can’t get their money back in the short term, with all buying and selling suspended for 28 days.
I’ve been through an uncomfortable episode like this before, prior to joining Nutmeg. During the height of the financial crisis, a few funds we held for clients were suspended because redemptions were too high to allow for the orderly sale of investments. But these were “alternatives” like hedge funds and commercial property, which typically required three months’ notice for redemptions. These vehicles were designed to allow for more illiquid investments (it is not easy to sell an office block or an industrial warehouse!) and were less tightly regulated, so they were not sold to the general public. I cannot recall the suspension of a mainstream equity fund that traded on a daily basis, and certainly not one that regularly appeared on “best buy” fund lists. I know from that experience that the suspension of the buying and selling of a fund destroys investor confidence.
The Woodford Equity Income Fund is an actively managed fund, aiming to beat the broad UK equity market by picking individual stocks. As such, we would never invest our customers’ money in it; we choose only to invest in exchange-traded funds (ETFs) which track a range of markets and asset classes. That means we have no direct exposure to the fund. Nevertheless, we recognise that a high-profile fund suspension like this is bad for confidence in funds in general.
That’s why I think it’s a good time to reiterate what makes Nutmeg’s approach different to some of our competitors.
When we designed and built Nutmeg’s investment process back in 2012, our approach to holding different types of investments or funds was anchored around three key aspects:
Low costs
Returns are uncertain, but lowering costs is a reliable way to improve them in the long term.
Transparency
A key lesson from the financial crisis was to always know exactly what you are invested in, so we regard complete transparency in what we invest in as paramount; you would be surprised that many funds will not reveal a complete list of what they hold, or only do so with a very long time delay (a list of ‘top 10 holdings’ is not sufficient).
Liquidity
We want to ensure that it is easy to buy and sell an investment on any day the markets are open, whatever the environment, so we view ‘liquidity’ as key to choosing an investment.
This is why we built our investment process on the use of ETFs. By their nature, because these funds are designed to be traded on market exchanges all through the day, they invest in assets that are tradeable. We can always see what we are invested in on a daily basis. And cost competition is extremely intense in the ETF industry.
ETFs sometimes get accused of being new and supposedly untested. But they turn 30 next year, with the first ETF launched in Canada in 1990, and have been through many difficult market periods. Our analysis shows that when markets go through tough times, investors actually put more money into ETFs, not take it out, so they are widely trusted as being good to hold for liquidity.
Even so, we still conduct regular reviews to ensure that the investments we hold can be easily bought and sold, including analysis of the individual securities held within each ETF. When we make big decisions on changes to portfolios, we always look at what is the largest size we can buy and sell at that moment without ‘moving the market’. This approach has served us well over the past seven years, particularly during bouts of high market volatility.
As ever, if you have any questions on our investment approach, please do not hesitate to contact us.
This article was updated on 6th June to clarify that Nutmeg has no exposure to the Woodford Equity Income Fund.
Sources
Risk warning
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance
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Shaun Port
Shaun is the chief investment officer at Nutmeg. He has over 25 years’ experience developing and implementing investment strategies for clients ranging from central banks to pension schemes to charities and private individuals. Shaun holds a degree in Mathematical Economics from the University of Birmingham and is a Chartered Alternative Investment Analyst. He can be found tweeting @ShaunPort.Other posts by Shaun Port