All aboard the Woodford Train…

For investors who like Woodford this is like investing in vintage Woodford. This is where it all started 25 years ago, and what he built into a hugely successful franchise.

If we believe the marketing spin, a once in a life time opportunity has occurred in the world of fund management.

Neil Woodford is a fund manager who divides many; a marmite character. In recent years, interviews with the manager have been rare; refusing to comment on his style instead allowing consistency and outstanding performance do the talking.

Part of this may have come from the savage criticism he suffered for refusing to participate in the dot-com bubble and preferring boring old fashioned companies (oil, pharmaceuticals etc). His approach meant in the short term the fund languished at the bottom of the pile. When the bubble burst it was his fund which looked the better investment and vindicated his approach.

It defined him as a man who was unafraid to stand out from the crowd and perhaps this led him into a reclusive mythical existence, refusing to be drawn into whether what he was doing was right.

This approach clearly worked and as his statue grew so did the assets he managed. But with success came challenges. Woodford has made no secret that he favours small and mid-cap stocks and although the fund at Invesco held some of these stocks the impact on performance was minimal. It meant that he couldn’t invest in companies he liked simply because of the assets he held and therefore the fund was skewed to large cap names.

This fed into the performance of the fund and although many refer to performance over the last 10 plus years, the reality was that over the last five years the Invesco Income Funds did little better than the iShares Dividend ETF.

The chart below shows five year performance of his two flagship funds up to the date he handed over the fund on the 6 March vs the ETF option:

IP Income Fund

This was missed by many people who still focused on past glories; it reminds me of a great manager leaving a great football club. Getting the timing right is a shrewd move because people will only focus on past glories and allow the new management to take the blame for future underperformance.

A new era

The new fund will follow the same tried and tested process.

Woodford will only invest in companies where he is convinced of the compelling long term opportunity and he will be prepared to go against consensus to deliver long term returns. To achieve this he is hoping to identify companies in the small and mid-cap range as well as large cap stocks.

For investors who like Woodford this is like investing in vintage Woodford. This is where it all started 25 years ago, and what he built into a hugely successful franchise.

Especially for equity funds there is a tipping point where size hampers performance and clearly this had started to happen at Invesco; they are not alone as M&G saw this happen to their Recovery Fund. By walking away from this Woodford has been given a clean sheet with a smaller more nimble fund allowing him to potentially repeat the success of the past (without the shackles of recent years).

However, there are concerns that he may be building a replica of the fund he left behind and this is important for investors to consider.

The new company is already building sizable assets under management – £400 million from Hargreaves Lansdown and £3.5 billion from St James Place. Other contracts have been agreed and although these are significantly below what he managed at Invesco this surely cannot be seen as a small nimble fund.

If these assets grow, which they will, then potentially where the fund may have had an advantage this will erode quickly.

Much of the marketing is based on past performance since 1988; the majority of this was achieved when double digit returns were the norm and initially when the funds were very different beasts. We have seen the funds struggle over the last five years and with lower returns expected it has to be challenged as to whether past glory can be repeated.

Dangers of marketing

The Fidelity China Investment Trust was heavily marketed by all on the assumption that a star manager (Anthony Bolton) could repeat past success.

The result – it failed.

In hindsight timing was bad, it played on the assumption that China had gone one way and that would continue (in reality it was going the other way) and secondly it was assumed that a star manager could repeat the success of the past (which he couldn’t).

Woodford is different because according to all the marketing material he is effectively ‘sticking to his knitting’ – this raises the question ‘why move?’

If he was moving so he could return to his original vintage Woodford ways then logically this would mean he wants less money under management, so he can focus on those areas of the market which he has been unable to tap into.

However, by growing assets quickly he seems to have shut that door.

So the untested question for investors is are investors simply buying into the fund he left behind and will that now just track an ETF going forward (based on the performance of the last five years)?

There are many excellent smaller, nimbler, well managed income funds which are potentially the Woodford funds of the future and therefore these may be a better option for investors.

Marketing spin will not help investors in this but it is something that needs careful consideration.

One other concern with ‘spin’ is price. There is a lot made of a fixed price of £1. The implication is that when the fund starts to ‘trade’ this could spike, this means for investors looking for a quick return they could do well to get in early.

But this is a fund; it trades as a fund and not a share. It simply will not spike and at the end of the fixed price period it could fall.

Should investors follow the Woodford Train?

Perhaps the question should be reversed: if an investor is looking to invest in an income fund, which fund delivers what they are looking for?

There are many income funds on offer and this is competing in that space. It may well be a fantastic investment over the next ten years but it assumes that the success of the past can be repeated, and that what has happened in the past five years can be reversed. Investors in the fund with St James Place also questioned this.

We don’t know what will happen in the future and have no crystal ball.

In football many excellent managers have been unable to repeat success outside of the environment which nurtured them, and helped them grow into the great manager they became. This is often the same in the fund management.

As is usually the case, time will tell.

 

NOTE: This is written in a personal capacity and reflects the view of the author.  The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

 

 

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