How I avoided the Neil Woodford Equity Income fund train wreck

Fool writer Edward Sheldon reveals how he dodged a bullet by dumping the Woodford Equity Income fund early last year.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Back in late 2014, I invested around £5,000 of my Self-Invested Personal Pension (SIPP) money in Neil Woodford’s Equity Income fund. At the time, I was very comfortable putting my retirement money into this fund as it was one of the best performers in its class and Woodford had a great long-term performance track record. 

However, as I explained in this article in February last year, I made the decision to bail out of Woodford’s fund and I reinvested the proceeds into a number of other equity funds. In hindsight, this was a very smart decision. Not only has Woodford’s flagship fund been suspended for over four months, but it was announced earlier this week has been sacked as the fund manager and that the fund will be wound up. Unfortunately, this means many will get back less than they invested.

Here, I’ll explain why I sold the fund last year and look at how other investors could have avoided the Woodford train wreck.

The fund changed dramatically

One of the main reasons I originally invested in Woodford’s fund was that it was marketed as an ‘equity income’ fund. This type of fund is designed to provide a mix of capital growth and income and generally tends to invest in large, stable, blue-chip companies. In this case, Woodford’s fund owned stocks such as HSBC Holdings, BAE Systems, British American Tobacco, and Reckitt Benckiser, so I was happy with how my money was invested.

However, over the next few years, the composition of the portfolio changed dramatically. Every time I glanced at a monthly report, it seemed that there was less focus on blue-chip stocks and more on speculative, early-stage companies. For example, at 31 December 2017, higher-risk companies such as Burford Capital, Purplebricks, and biotechnology company Prothena were all in the top 10 holdings (all three of these growth stocks have crashed since).

Now, this wasn’t what I signed up for. In my pension, I was looking to invest in established, dividend-paying companies that would provide a degree of stability, not volatile early-stage growth stocks. For this reason, I sold out of the fund. That has turned out to be a very good decision.

The takeaway

To my mind, the main takeaway here is that if you’re outsourcing the management of your money to someone else, it’s crucial to understand exactly what you’re investing in and monitor your investments on a regular basis to determine that they’re still suitable for your requirements.

I realised the Woodford fund was a disaster waiting to happen because I regularly looked at the monthly reports and examined the fund’s portfolio. It was no longer what I was looking for, so I dumped it.

There were plenty of warning signs the fund had issues. For example, I looked at it again in April this year, just a few months before the suspension, and said it was one to avoid because it was “quite risky.” Hopefully, that article saved a few Fool readers. 

Ultimately, the bottom line is that when investing your money, it’s essential to do your own research.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in BAE Systems and Reckitt Benckiser. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Yellow number one sitting on blue background
Investing For Beginners

My number 1 tip for Stocks and Shares ISA investors

This strategy has improved Edward Sheldon’s ISA returns dramatically and he thinks it could help other investors have more financial…

Read more »

White female supervisor working at an oil rig
Investing Articles

Down 20% in a year, is the BP share price simply too cheap to ignore?

After sliding for months, is the BP share price as low as it'll go? Even with the risk of more…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

4,123 shares of this UK dividend stock could get me £206 a month in passive income

Despite cutting its dividend significantly over the past five years, I think this FTSE 100 stock could be a good…

Read more »

Investing Articles

3 champion investments to beat the stock market in 2025

Looking for alpha? Dr James Fox details three investments that look destined to outperform the stock market in 2025 and…

Read more »

Investing Articles

2025 stock market recovery: a once-in-a-decade chance to get rich?

Zaven Boyrazian explains how he'd use the ongoing stock market recovery to his advantage, creating long-term wealth.

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

£20,000 in an ISA? Here’s how I’d aim to make £1,250 a month in passive income

Our writer thinks one rare FTSE 100 stock could help drive an ISA portfolio higher, resulting in a sizeable passive…

Read more »

Black father holding daughter in a field of cows
Investing Articles

£25k of savings? Consider aiming for a £1k+ monthly passive income via this strategy

With a long-term mindset, investors could target a four-figure monthly passive income by investing £25k in low-volatility blue-chip stocks.

Read more »

Investing Articles

The Rolls-Royce share price hit new highs in November. What next?

November has been another record-breaking month for the Rolls-Royce share price. And the outlook for 2025 still looks bright.

Read more »