Not all that long ago, Neil Woodford was slated as one of the UK’s leading investment success stories. Featured by multiple press publications as ‘one to watch’, retail investors flocked to him as he made generous returns at investment house Invesco Perpetual. When he moved to establish his own funds in 2014, hundreds of investors followed him – I even recall a relative asking me what I thought of him.
At the time, I told them not to bother – that he was a fad and that like every fad, he’d fall off the top eventually and that retail investors would likely panic when he did, leading to outsized losses. Sure enough, four years later, and guess what? Woodford’s come off the boil and just about every commentator out there is now declaring he’s ‘lost his touch’. Retail investors are piling out of his funds and his popularity is waning. But is it justified?
Four years ago, I was pretty bearish on Woodford. Anyone that tips a fund manager as a ‘sure thing’ probably doesn’t understand investing well enough. All of us have periods when we’re ahead of something and periods when we’re behind it. To think that there is any magic manager that can change this is just wishful thinking. You can be benchmarked against a whole range of different asset classes, currencies, baskets of shares and over different time periods.
Neil Woodford’s funds have unique criteria and Neil himself has a particular style of investing. He makes concentrated bets on a handful of companies, usually small and ‘unliked’ ones, which are generally extremely volatile. I wonder how many retail investors really appreciated that when they invested with him and how many of them just saw his annualised returns at Invesco and thought they would continue ad infinitum?
I decided to do a bit of research into Woodford’s Income Focus and Equity Income Funds, as well as his Patient Capital Trust (PCT). I’m going to start with the most misunderstood of these – PCT. A quick examination of the holdings uncovers an amazing concentration of companies – more than 60% – held in health care, technology and financial companies. Traditionally, these are incredibly volatile sectors and PCT is investing in start-ups.
In case any of my readers aren’t aware, start-ups and young businesses are generally a lot more risky than established ones. It can take years for them to turn a profit and they often require significant capital investment (running at a loss) for years before this happens. This isn’t exactly hidden on their website (https://woodfordfunds.com/funds/wpct/trust-facts/). But let’s be honest here, how many people really wanted to accept that they could be waiting ten years for their investments to show a profit and how many just figured they’re be getting Woodford’s 10% a year from the word go?
The two funds also make for pretty interesting reading. By their names, ‘Income Focus’ and ‘Equity Income’, I would expect the focus to be on income rather than capital gains. Income plays a large role in my own investing style, but I’m well aware of its limitations.
These include an attraction to ‘value traps’ where an investor buys high-yield shares with an uncovered dividend, leading to dividend cuts, reduced yield and investors selling the shares, eroding capital. Likewise, companies that focus on dividends can also underinvest in their company (see Carillion as an example – a massive loss-making enterprise but a huge dividend that was sustained until the last minute).
Again, I wonder how many investors really understood that Woodford was aiming to provide income from these funds rather than capital gains. I know the description of both funds includes the standard line ‘aiming to provide income as well as capital growth’, but look at the holdings and look at the name! More than a cursory examination of these supports the idea that trying to pursue a policy of both income and capital gains rarely results in achieving both.
Doing anything in life without educating yourself first is a recipe for disaster and investing is no exception to this. If you’re reading this article, then you’ve got access to the internet, and if you’ve got access to that then you can read hundreds of articles from leading thinkers around the world on any topic from biochemistry to lunar geology.
Personally, I think Neil Woodford is a considered, experienced fund manager, but I wouldn’t rely on him any more than I do any other fund manager to be the sole designer of my financial future. I don’t invest in any of his funds, but that’s because they don’t match my personal criteria for investing. I don’t generally like start-ups, I don’t generally like healthcare companies, I certainly don’t like tech start-ups (who all seem to promise things I either don’t understand or seem too good to be true).
I’m well aware that there are good opportunities in these fields, but they’re not ones that I understand. If I don’t understand them, then I can’t analyse them, and if I can’t analyse them, how am I supposed to determine which ones to invest in?