As I write this article one of the leading UK investment funds, LF Woodford Equity Income Fund, has made the dramatic announcement that no investor can withdraw their money for an as yet unspecified period of time. While the reason for this is to protect continuing investors, it is likely to cause great anguish to anybody who needs their money urgently.
Liquidity – being able to get your money within a matter of days – is, in FFP’s point of view, absolutely crucial to a successful investment strategy. After all, part of the investment promise is that you can have your money back when you want it.
One of the problems of traditional investment management is an underlying premise that a fund manager can obtain a better return than the market as a whole. Intellectually this seems to be a false assumption as the majority of the market is dominated by professionals. A simple understanding of the law of averages would suggest that only half can do better than average, with the other half doing worse. And this is before any costs have been taken into consideration. All available evidence suggests that when a fund manager achieves better returns than the market as a whole that this is either as a result of chance or it is by taking additional risk. The normal market benchmark might be the FTSE All Share Index – however, part of the problem of the Woodford fund is that they invested in unquoted companies, in other words where there is no daily tradable market.
FFP has always followed the principle that spreading the risk as widely as possible is always likely to be of benefit. After all, there has being a saying “don’t have all your eggs in one basket” ever since speech was invented. There is also a saying that, insofar as an investment portfolio is concerned, you should never hold enough of any one holding to make a killing or to be killed.
FFP has an academic evidence-based approach to investing. It is not exciting, but it delivers. Our investment portfolios typically include more than 5,000 daily tradable companies throughout the entire world. Not only does this reduce the impact of the risk of anyone company becoming totally worthless overnight it also significantly improves the liquidity.
While we cannot guarantee to eliminate risk entirely, a well thought out, robust investment process reduces risk whenever possible.