The fall from grace of former investment superstar Neil Woodford was the product of several missteps. While the more egregious of these are likely to continue to dominate the headlines, no account of his travails would be complete without considering the turn in fortune experienced by his traditional style of income investing. Indeed, while there’s no denying the extent to which Mr Woodfood’s portfolios drifted towards holding highly speculative illiquid investments, had his holdings in large liquid income plays delivered strong returns, events may not have proved as cataclysmic – or at least not so soon.
A sharp turn in fortune of a previously successful strategy is an inherent risk in fund management and investing generally. Managers that retire without encountering such reversals often achieve near mythical status, despite the near certainty that luck plays a noteworthy role in such outcomes as well as skill (many believe what is classed as active manager 'skill' is simply mislabeled 'luck'). In the past, Mr Woodford had actually been lauded for sticking with his income investment style while enduring significant underperformance during the dot-com boom. Then he was judged to be fully vindicated by his outperformance during the subsequent dot-com crash; this time he may not have the chance to salvage his reputation.
Changes of fortune for investment strategies beg the question of how quickly fund investors should be to act when an erstwhile star manager starts to underperform. Two research papers from the past 12 months offer some interesting, if somewhat contradictory, perspectives on this issue.