I’m an investment hypocrite – and it’s cost me

Despite wariness at the idea of ‘superstar’ fund managers, I backed one. It hasn’t gone well.

There are all sorts of reasons that might tempt you into investing into something, whether it’s an individual share, a managed fund or an index tracker.

It might be that you’ve read about something exciting that a company has planned, and you reckon they are in line for a bumper share price rise.

Or perhaps you are already investing in UK companies and want to get a little exposure to the emerging markets, and figure a fund is the best way to do it.

Another big factor for some investors is the name of the person in charge of the fund.

There are quite a few fund managers who are liable to be described as ‘superstars’ by the industry, and their name alone may be enough to convince a decent number of investors to stick some money in it.

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The cult of personality

This is understandable to some extent.

Investing isn’t easy, and so if someone has an established track record of delivering great returns for their investors, then of course it is going to be more tempting to invest in their funds than those managers who don’t have a great history to point towards.

However, this ignores the fundamental warning that you’ll see alongside every decent investment venture, that past performance is no guarantee of future results.

That doesn’t just apply to the investments themselves – it applies to the people overseeing them as well.

It’s precisely because of this that the very phrase ‘superstar fund manager’ makes me cringe.

I don’t think it’s healthy to give them this rockstar status, as if having their name attached to something gives it inherently more value than a relatively unknown fund that has better fundamentals behind its investing strategy.

The Neil Woodford effect

A good example here is Neil Woodford. Arguably the biggest ‘superstar’ in the fund management world, where he goes, others follow.

After many years successfully running funds at Invesco Perpetual, Woodford stepped away in 2014 to set up his own venture, Woodford Investment Management.

When he did so, investors fell over themselves to pull their cash out of those old funds and instead followed Woodford, backing his new funds with vast amounts of money.

And despite my many reservations about the cult of personality that surrounds these apparent superstars who can do no wrong, I did exactly the same.

Whereas up to that point I had solely invested in tracker funds, I decided to follow the herd and devote a chunk of the money I put aside in my pension each month to go towards the Woodford fund.

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Where did it all go wrong?

The trouble is that, despite a promising start, things have gone downhill for Woodford.

Here’s how the fund has performed over the past four years:

Back in 2017 he openly apologised to investors for the frankly rubbish performance of his various funds, typified by the fact they had such a significant stake in Provident Financial, a doorstep lender which has had rather a tough time of things.

That certainly wasn’t the only dodgy call made by Woodford, and it’s led to a host of investors heading for the door.

At the time of writing, his LF Woodford Equity Income fund holds £4.7 billion, half the amount it held at its peak.

Investing for the wrong reasons

I still have money in the Woodford fund, though my stake is worth just shy of 6% less than I paid for it. It’s the only managed fund in my very conservative SIPP, and it’s the only investment that has lost money (so far, anyway).

That’s my own fault. I was suckered in, and invested for the wrong reasons – rather than following my usual policy of sticking to the slow and steady returns you get from trackers, I invested in a name.

There’s nothing wrong with investing in a managed fund, so long as you do your homework and are comfortable with what it’s investing in and why.

Just don’t do what I did and invest solely because of the name of the fund manager. 

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Have you ever made an investment based purely on a name? How do you make your investment decisions? Share your thoughts in the comments section below.