Neil Woodford loses glow as recent fund performance stutters
UK fund manager’s setbacks fuel questions ability to pick winning stocks
Neil Woodford, one of the UK’s most highly regarded fund managers, is rarely in the spotlight for the wrong reasons — but the past month has been different.
Last week brought disappointing news from two key funds. The investor’s £900m listed trust shifted its investment strategy following underwhelming performance in 2016. Meanwhile Mr Woodford’s new UK equity income fund — the second of its type to launch since he left a career at Invesco Perpetual to start his own business — had attracted only a third of the funding of the first.
Mr Woodford’s funds have suffered some high-profile setbacks, with companies including UK intellectual property company Allied Minds and pharmaceuticals group Circassia suffering sharp share price falls in recent weeks.
The stumbles have raised doubts among brokers over Mr Woodford’s ability to go on picking winners, forcing some to stop recommending his funds to clients.
“Our analysis showed his alpha capability had peaked,” says Michelle McGrade, chief investment officer at TD Direct, a broker that removed the equity fund from its recommended buy list “some time ago”.
When Mr Woodford left Invesco Perpetual in 2014, he was riding high on a reputation for taking large, sweeping bets for or against entire sectors — and winning. The result was that over 25 years of managing funds, he would have turned a £1,000 investment to £23,000.
That performance has not been replicated at his new company, Woodford Investment Management.
Mr Woodford’s listed trust, Woodford Patient Capital, is down 3.1 per cent on a total return basis since its launch in April 2015, compared with a rise of 10.7 per cent for the FTSE All-Share index, and has failed to meet the provider’s own performance targets.
His flagship £10bn equity income fund is also beginning to struggle. It has underperformed the FTSE All Share over the past year, returning 12.6 per cent to the FTSE All Share’s 22 per cent. It has, however, outperformed the index by 10 per cent since launch in 2014.
He’s a true contrarian — he’s willing to keep going even when people are saying he’s lost the plot
Laith Khalaf at Hargreaves Lansdown
Retail investors pulled £50m of cash from the equity fund in January and February in its first ever two-month run of redemptions. Two brokers — Fidelity Personal Investing and Barclays — say it has never made the list they suggest to clients.
Analysts point out that some of the recent downturn in Mr Woodford’s performance is linked to a shift in investment strategy since he left Invesco, where he managed £33bn.
There his funds were filled with big, defensive blue-chip stocks — tobacco and pharmaceuticals were a particular favourite.
The newer funds have relatively large positions in small unquoted, early stage companies, usually — but not exclusively — in the healthcare sector.
“Dealing with unlisted companies is different,” says Rory Maguire, an analyst at rating agency Fund House. “There is no sell side coverage to help you.”
Allied Minds, the UK intellectual property company that is 30 per cent owned by Mr Woodford, suffered a 37 per cent share price fall in just two days this month after it wrote down the value of seven of its investments by $146.6m.
Circassia, a pharmaceuticals company that floated in 2014 in the UK’s largest life sciences public offering for decades, has been another setback. This month it revealed larger than expected losses for 2016, after the failure of key drug trials.
Meanwhile a further holding — Northwest Biotherapeutics, a US biotech company — filed a note with the US regulator warning there was “substantial doubt” about its ability to continue operating.
Fans of Mr Woodford say he has always dabbled with unlisted investments, even during his time at Invesco. “It’s something he’s been doing for a long time alongside all the large-cap stuff,” says Laith Khalaf, analyst at broker Hargreaves Lansdown.
According to figures from Morningstar, the data provider, about 5 per cent of his Invesco Perpetual Income fund portfolio was unlisted when he left the company in 2013.
For his current equity income fund, that figure has almost doubled to 9 per cent — close to its maximum quota of 10 per cent. That proportion has unnerved some fund analysts, who have questioned whether it is “safe” to have large positions in unlisted stocks in an income fund — an almost unheard of situation.
“Someone with such a large potential universe and who owns a small subset of these companies in such large amounts, over long periods . . . there is no questioning his confidence,” Mr Maguire adds.
A spokesman for Woodford Investment Management says: “Neil continues to adopt the same philosophy that has underpinned his investment strategies over his 30-year career. Since he launched the CF Woodford Equity Income fund in June 2014, the fund’s exposure to FTSE 250 stocks, Aim-listed companies and unquoted opportunities has slowly increased as the opportunity set . . . has evolved.
“His investment approach always represents a pursuit of long-term valuation anomalies.”
Simon Elliott, head of research at broker Winterflood, says the kind of strategy used by Mr Woodford will see a “significant number of failures”. The bet is that the winners will win more than the losers lose.
Mr Woodford has had some successes. Biotech companies Oxford Nanopore, Oxford Sciences Innovation and Proton Partners International increased in value in 2016.
Among the high-performing listed portion of his early stage holdings are Theravance Biopharma, the share price of which more than doubled over 2016, and online UK estate agent Purplebricks.
Some commentators say it is difficult to get a sense of Mr Woodford’s performance record when it comes to unlisted companies. “It’s hard to get visibility on how successful his investments in that end of the market have been because they’ve been buried in a big blue-chip fund,” says Jason Hollands, a wealth manager.
Still, backers tend not to be deterred. “What you’re looking for with Woodford is for him to do his stuff,” says Mr Khalaf at Hargreaves. “He’s a true contrarian — he’s willing to keep going even when people are saying he’s lost the plot.”