How to lose both trust and Dh30,000 in the financial system

Failures like the Woodford fund have broader effects, changing consumer attitudes towards investments and derailing the best-laid plans

Neil Woodford, the founding partner of Woodford Investment Management, in London, UK

Neil Woodford used to be regarded as the UK’s most successful investment fund manager, but his financial empire has unravelled over the past 12 months. Only now is the full cost being counted by customers, including me.

Last week, the Woodford Equity Income Fund was finally wound up after a drawn-out process that left investors locked out of their investments for months on end as their value slowly ebbed away.

It is distressing to calculate how long it took to accumulate the money I have lost and how much time it will take to make up that shortfall

My own losses amount to at least Dh30,000, probably more. That figure could have been far worse and in some ways I count myself lucky. There are many other investors who have suffered much more than me, but it has been a chastening and frustrating experience.

The fund had been suspended in June over fears that a large volume of withdrawals could precipitate its collapse. Its management blocked further redemptions while they sought to restructure its portfolio of assets, which had been worth £10.2bn (Dh48.9bn) at their peak but had shrunk to £3.7bn (Dh17.75bn) by the end of May 2019.

That process of rebalancing failed to restore confidence, and the fund was closed for good in October. Mr Woodford left the business at the same time and investors were advised that what remained of their capital would be distributed back to them this month. The Woodford Income Focus fund, the last and smallest piece of what was once a much larger jigsaw, will reopen next week, albeit under new management.

Investors in the Equity Income Fund were told that their settlement would amount to around 75 per cent of the sum that remained in their savings pot, compounding an already large loss after years of underperformance. Indeed, if you had invested Dh100 (£20.85) in the fund three years ago, it would be worth not much more than Dh50 (£10.43) now.

Experts will tell you that “past performance is not a reliable indicator of future results” and that “the value of investments may go down as well as up” as a way of reminding you that even so-called rock star fund managers with proven track records – as Mr Woodford was for many years – are capable of producing duds, too. They might even point to the fact that investors can walk away with some of their cash intact as an illustration of the inherent strength of the system.

But this rather underplays the human cost of such a scandal.

Failures like this have broader effects, breeding greater mistrust in the financial system, changing consumer attitudes towards investments and derailing the best-laid plans.

In my case, the money I have lost was part of a long-term investment strategy for my family.

While I am fortunate enough to have time to mend the shattered parts of my investment pot, it is distressing to calculate how long it took to accumulate the money I have lost and how much time it will take to make up that shortfall. The experience is akin to taking hard-earned money out of the bank and burning it.

There is also a chance that the Woodford loss will push investors into extreme reactions: either taking on more risk to chase their losses or becoming substantially more risk-averse after such a terrible experience. Fight or take flight are both reasonable responses to this sorry mess.

In the short term, investors will be running to stand still financially and will be doing it while being buffeted by the negative sentiment that the recent coronavirus outbreak has had on global markets.

And let’s be clear about this, the Woodford fund wasn’t a sketchy scheme that I was hoodwinked into signing up to. It was strongly recommended and seen as a shrewd fund to invest in.

There are other problems for savers, too.

In the 12 years since the onset of the global financial crisis, most of us have faced a tough choice between buying into charge-laden investment plans that might not perform as well as the brochure would have you believe, or sticking your funds in a savings account and watching the value of your cash get chipped away by an inflation figure that far outstrips insipid interest rates.

Alternatively, investors can switch from active into passive funds, something our personal finance pages have regularly highlighted. Or you can be your own fund manager and trade on one of the many platforms that allow you to buy and sell pretty much anything, including shares, cryptos, currencies, exchange-traded funds and commodities. But those do-it-yourself options also need to be handled with care and are not for everyone.

The UK’s Financial Conduct Authority supported the decision to wind up the Woodford Equity Income Fund because it ended a period of uncertainty for investors. The FCA has also opened an investigation into “the activities that led to [its] suspension”.

Its findings will be crucial and will indicate a great deal about the industry’s appetite to learn from its mistakes. For the sake of all investors, let’s hope there is a taste for change and for improved oversight and regulation.

Nick March is assistant editor-in-chief at The National