Over the last few days there has been a deluge of news around the suspension of Neil Woodford’s UK Equity Income fund. In fact, at one point, on Monday, the name “Neil Woodford” was the number one trend on Twitter in the UK.
Out of everything that has happened over the last 48 hours, the most predictable was the outcry… the phenomenal reaction to what has happened with Woodford’s fund, in particular around the fund’s suspension.
Institutions, Advisers, and direct customers have taken en-masse to do what is the norm in this situation; they’ve pointed their blame finger directly at the man himself.
It’s all his fault. His investment strategy and subsequent decisions, have failed us all.
But, dig a little deeper and it also becomes clear that there were a ton of different behavioural biases at work that initially drove capital into his fund, and has kept money flowing in, despite clear signs that the risk / reward balance was not correctly aligned to the notion of equity income and securities that have these characteristics.
Yet, how many of those investors caught in this current situation are stopping to explore these behavioural biases, THEIR behavioural biases, and reflect on how they played out when they decided to invest in his flagship fund, or more recently, opt to exit his fund? I would suggest not many.
THE IMPACT OF IGNORING BEHAVIOUR
From the very beginning of Neil Woodford setting up his own company, it was clear that there was a clear and significant Herd Mentality at play. “Wherever he goes, I shall follow” and “if everyone else is investing there, then it must be the right thing to do.” In fact, as is often the case with star fund managers, investors follow them around, in the hope that their previous Midas touch will continue to bring them success.
This is one of the main reasons why, at launch of his Equity Income Fund in 2014, ‘fans and followers’ invested £1.6bn into his fund. A staggering amount of money.
He became a retail investor pin-up boy, with people placing him on this pedestal, portraying him as some kind of hero of the investment world. This Halo Effect, wasn’t an image he portrayed himself, but one that was created and perpetuated throughout the investor world. It wasn’t helped by the fact that certain companies, big consumer brands, threw everything they had at promoting the fund within their customer base. The promotion triggers our Authority Bias, whereby investors trust the judgement of the authority (the big brand) and in doing so, allow that to overly influence their decisions.
Investing your money into a financial product, where the underlying detail isn’t truly understood, and is only based on the public persona of the fund manager, is quite frankly setting yourself up for potential problems. For example, I would suggest that not many people knew Neil Woodford clearly felt it was acceptable to put capital to work in illiquid situations where the weight of his holdings would require a very patient investment approach, and not early withdrawal.
This structure, this approach, would wreak havoc with those investors who have a heightened state of present bias, which would absolutely be exacerbated by the vast amount of negative news currently circulating. This in itself will awaken a series of behavioural biases that may have laid potentially dormant… behaviours such as myopic loss aversion, regret aversion, and action bias.
DO YOUR DUE DILIGENCE… ON YOURSELF!
Star fund managers will come and go… rise and fall, and the one thing they will all have in common is that will not possess a crystal ball. They will have an approach, a strategy, and they will execute that strategy on the belief that it is right for investors.
However, we all so need to be absolutely aware of the fact that we, as the investor, are influenced by our behavioural biases, our knowledge and understanding of how these funds operate, and the parameters and strategic guidelines within which they function.
We need to accept, as a given, that if we choose to ignore the cognitive and affective biases that influence our every choice, then when things go wrong, as they have in this case, the burden of culpability for us losing money, doesn’t wholly sit with the fund manager. We share some of that responsibility.
This is why at Be-IQ, we believe behavioural insight is so crucial. Crucial to ensure the choices made take into account a fully rounded, fully informed view, and not one that is influenced by Herding, Authority Bias, Present Bias, Myopic Loss Aversion, Regret Aversion, or Action Bias.
In my recent blog about London Capital & Finance, I raised the issue of behavioural biases being exploited at the detriment of investors. I don’t believe this is the case with Neil Woodford. He didn’t purposefully mislead his investors on his intentions and the implications that could follow. However, the common thread between these two stories is our behavioural biases. With London Capital & Finance they were exploited. With Neil Woodford, they were ignored.
If we allow our behavioural biases to go unchecked, untested, unchallenged, then we are putting ourselves in a dangerous place. A place where life savings can be invested, but also where life savings can be lost. Yet this can all be solved by not only taking the time to properly and accurately ‘know thyself’, but by recognising, and then accepting, that the ultimate decision-maker in whether to invest your money, isn’t Neil Woodford, it’s you!