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Four lessons for investors from the collapse of Thomas Cook

23 October 2019

3 minute read

Major insolvencies can be deeply worrying for investors. We explain what happens when a company goes into administration and look at ways to manage investment risk.

Who's this for? All investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek professional independent advice.

What you’ll learn:

  • Why there’s no such thing as a safe bet.
  • How diversification can help minimise the impact of one company running into difficulties.
  • What happens when a company goes into administration.

Travel agent Thomas Cook recently became the latest high street business to cease trading, after a last-ditch attempt to secure a rescue bid failed.

Thankfully Sunderland-based travel company Hays Travel has bought Thomas Cook’s UK travel agency business and hopes to save the jobs of 2,500 former Thomas Cook staff. However, thousands of other employees have lost their jobs, as Thomas Cook operated in 16 countries and had 21,000 employees worldwide.1

Seeing any major name collapse can be deeply worrying for investors, especially one that’s been a trusted brand for hundreds of years.

Here, we look at four lessons investors can learn from the demise of Thomas Cook and some of the other big companies that have collapsed in recent years, such as construction company Carillion and retailers Woolworths, BHS and Toys R Us.

Lesson one: There’s no such thing as a safe bet

It can be tempting to invest in the big household names we’re familiar with because they feel like a safe bet. After all, many of them have been around for hundreds of years, so it may seem inconceivable that they’d ever disappear, even if recent collapses show otherwise.

A few decades ago, few would have predicted the fall of Thomas Cook, the company responsible for transporting millions of holidaymakers across the globe for more than a century. Yet the company was hit hard by the rise of budget airlines and low-cost online competition, not to mention a mountain of debt which left it hugely over-stretched.2

Similarly, Debenhams traces its history back to 1778 and at one point commanded a market value of more than £1bn,3 but in April this year saw its shares removed from the London Stock Exchange. It is just one of a number of retailers who have suffered in recent years due to weaker consumer confidence amid ongoing Brexit uncertainty, and from the growth in internet shopping.

However long-standing and well-established a company is, remember that no business is ever immune to financial difficulties, so if you’re considering investing you must be comfortable accepting the fact you could get back less than you put in.

Lesson two: Putting your money into any individual company is a highly risky approach

Picking individual shares – and hopefully avoiding those which could run into problems in future – involves time and skill and is therefore usually only appropriate for experienced and knowledgeable investors.

Investing in pooled investments such as unit trusts, open-ended investment companies (OEICs), investment trusts and Exchange-Traded Funds (ETFs) can help spread risk because you are putting your money into a wide range of shares, bonds and other assets which are chosen by professional fund managers and monitored on your behalf.

You can add further layers of diversification by spreading your money across funds in several different sectors and geographical areas. This means that when a stock market shock occurs, the hope is that other parts of your portfolio may perform well enough to offset any losses. Bear in mind though that however much you diversify, you could still get back less than you invest.

Lesson three: Actively managed funds may help investors avoid problem companies

Investing in an index tracker fund or an Exchange-Traded fund (ETF), which usually mirrors the performance of a particular index like the FTSE 100, means you effectively buy a slice of everything held within that index.

When you choose an actively managed fund, however, the hope is that the manager will, through their expertise and research, select the stocks they believe will provide the best returns, whilst steering clear of companies which could potentially run into difficulties, such as those which are highly indebted.

According to Michael Haslam, Head of Funds Distribution at Barclays, Toys R Us provides a good example of the benefits of active management. He said: “If you, as an active manager, had simply bought every single high yield bond in the index except Toys R Us, then you would have outperformed the index.

“Then, if you’d managed to avoid the other ‘accidents waiting to happen’, for example, all the other retailers which have suffered in recent years due to Amazon, and all the media companies whose advertisers are deserting them in favour of online mediums such as Google and Facebook, you would have outperformed even more. That is why we favour active managers on our Funds List, because with an ETF or tracker fund you are simply buying everything.” Though of course it is easy to see the things to avoid with hindsight. Active managers could get this wrong in future and avoid shares which then proceed to perform well.

Bear in mind however, that actively-managed funds tend to have higher charges than passive funds such as index trackers or Exchange Traded Funds (ETFs) which usually mirror the performance of a particular index like the FTSE 100. There are also no guarantees that even the best active fund managers will beat the fund’s benchmark or index or beat the passive funds’ performances.

If you’re considering investing in an actively managed fund, it’s a good idea to do plenty of research first so you can find those that you believe have the potential to outperform. You’ll find lots of useful information in our Research Centre, and our Barclays Funds List can help you narrow down the wide range of funds available for you to invest in. Please bear in mind though, we’re not recommending any of these funds, so it’s up to you decide which, if any, are right for you. If you’re unsure where to invest, you should seek professional advice.

Lesson four: If a company collapses, shareholders are unlikely to get anything back

If a company goes into administration, it may carry on operating whilst the administrators try to find a buyer for viable parts of the business. If there are no meaningful assets to sell, a company has no option but to go into liquidation.

When a company is liquidated, assets are sold off and the company is dissolved. Cash raised from the sale of assets goes towards paying off the fees and charges of the bankruptcy or liquidation, followed by creditors. There is an order of priority established among the creditors who are owned money. The general rule is that the parties who accepted the most risk when they invested in or lent money to the business are paid last.4 If debt levels are very high, shareholders are unlikely to get anything back.

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The value of investments can fall as well as rise. You may not get back what you invest. We don’t offer personal financial advice so if you’re not sure about investing, seek independent advice. Tax rules can change and their effects vary depending on your individual circumstances.

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