Ruth Morgan is one of thousands of investors who has found that her money is now stuck in the Woodford Equity Income fund.
The fund has gated, blocking investors from taking money out, after it was hit was a wave of redemptions in the wake of a sustained period of poor performance.
Morgan invests in the fund via two Junior Isas, for her children, one-year-old Ella and nine-year-old Erin. Ruth says: “I transferred the money from a child trust fund to a Junior Isa about five years ago.”
She invested around half of this money into Woodford Equity Income and Fundsmith Equity as core holdings, with the rest being spread across a range of other options including ETFs.
Ruth, who lives in South London, says: “The two seemed like good building blocks; the kind of funds where I could invest my money and then forget about it for the next few years.”
As Ruth points out, both managers — Neil Woodford and Terry Smith — had good long-term track records in the fund management industry. Rather than consider them "star" fund managers, she saw both as a “safe pair of hands” that should deliver above-inflation returns over the longer-term.
However, since she has invested, returns on these two funds have diverged quite dramatically.
Ruth explains: “I have drip-fed money into these accounts over the years so the performance figures are not exactly clear cut. I was making regular payments into both but after a period of poor performance, I stopped contributing to the Woodford fund around a year ago."
The last statement Ruth received showed how the two funds had performed overall: the holding with Fundsmith Equity is up 81% over the period she has been invested, while the Woodford Equity is down 19.9%.
Although she stopped contributing to the Woodford fund 12 months ago, Ruth did not consider transferring her money out at this point. “I had other funds that had done well — including Fundsmith Equity — so I felt this compensated for the poor performance elsewhere.” She was also hopeful that this was a more temporary blip and performance would pick up.
Ruth is still taking a long-term view and is not unduly panicked about the fund being temporarily closed. As she points out, it is at least seven years until her eldest child can access these funds. Unlike Isas, or other savings plans, this isn't money that the family could draw on in an emergency.
She says: “Obviously it means we can’t transfer holdings to a better performing fund at present.” But she believe that the block on withdrawals may be better for remaining investors, giving the manager time to reposition the portfolio rather than being forced to sell assets at knock-down prices.
Still, she is unsure whether she will switch when the fund re-opens.
Since the fund has been gated, Morningstar has downgraded its analyst rating from Neutral to Negative. Announcing this change, Morningstar analyst Peter Brunt said: “With portfolio positioning now focused more on sourcing liquidity than on investment conviction, we consider the strategy structurally impaired in its ability to implement its investment process.”
In contrast, Fundsmith Equity has a Gold Rating and five-star rating, the highest that Morningstar can award.
Morningstar analyst Brunt says: “This is one of the strongest options for investors seeking exposure to high-quality global equities. Terry Smith co-founded Fundsmith LLP and launched this strategy in 2010 on the back of the success he achieved as investment adviser to the Tullett Prebon pension fund.”
Woodford is an equity manager who has traditionally sought out so-called value companies, which are out of favour with the market. Over recent years this style of investment has struggled to perform against more growth-oriented strategies.
In contrast, the style of the Fundsmith fund seems to have a found a sweet spot in the market. Morningstar points out that while returns have been excellent in recent years — the fund has delivered annualised returns of 21.75% over the past five years, according to Morningstar data — this fund itself is not without risk.
Brunt says: “Smith’s investment philosophy is to buy and hold, ideally forever, high-quality businesses that will continually compound in value.
“This is a very high-conviction and long-term approach. There are elements of sector concentration (large parts of the market are excluded) and elevated valuation risk in the portfolio, and returns may look at odds with the broad MSCI World Index over the short term.”
But he adds: “While returns have benefited from style tailwinds since launch, we believe Smith has added significant value above and beyond the strategy's style bias.”
Elsewhere, Morgan invests in a wide range of different investments, spread across different asset classes and geographical sectors. These include both passive funds as well as more actively managed investments.
She says: “The Vanguard FTSE 100 tracker fund has done particularly well but so has our investment in BNY Global Income and M&G’s emerging market bond fund.”
The Vanguard range of passive funds are low charging, and this particular fund has benefited from the lower value of sterling after the Brexit referendum. Many of the firms that dominate the FTSE 100 are global multi-nationals, and the weaker pound has boosted their profits, once overseas earning are converted back into sterling.
Ruth, who runs her own business and works part-time as a charity trustee, remains optimistic that the two Jisas will provide a nest egg for her daughters. “Hopefully it will help towards their university fees, or perhaps even go towards a deposit for their first home, that is if they grow up to be that sensible.
“It still seems a long way away, but hopefully there is enough time for these investments to continue to grow into a reasonable fund.”
