Will lightning strike twice for fund star Woodford?
It is a landmark moment in British fund management. One of the most successful managers of the last two decades, Neil Woodford, has this week launched a new investment company.
Mr Woodford takes the helm at the eponymous Woodford Investment Management after finally severing links with Invesco Perpetual, the Henley-based group he first joined in 1988.
The move should not be underplayed. Mr Woodford is a star of the fund management world. He has a big following among investors; as soon as he announced his intention to quit Invesco in October, financial advisers were inundated with requests to switch their money to his new fund.
He is also lauded as one of the few managers to be able to run billions of pounds while delivering top-quartile returns and a steady level of income. Over 25 years, his flagship high income fund delivered 2,365 per cent in cumulative returns or 23 times the money originally invested, according to Morningstar data.
Under his new venture, he will have about £4.5bn under his control at the outset. Few other individual fund managers could attract such large sums so quickly. He oversees about £3.7bn in segregated funds with wealth manager St James’s Place and his new income fund will have about £1bn in assets.
More money will almost certainly flow his way. But is he worth the star billing, and will he continue to deliver the market-beating returns that established his reputation as arguably the best UK fund manager of his generation?
It has been a long week for Mr Woodford, who officially left Invesco on Tuesday – the day after the company was hit with a £18.6m fine – one of the largest levied against a retail fund manager – for breaching investment limits and introducing leverage into funds, including those run by Mr Woodford, without sufficient disclosure.
Although financial advisers played down the significance of the fine, it still cast a shadow over Mr Woodford’s new venture.
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Pensions guidance, Woodford's new venture and frontier markets
Jo Cumbo explains why the government's pensions guidance guarantee is not quite what it seems. Also in the show, David Oakley talks about the prospects of Neil Woodford's new fund, and Jason Hollands of Bestinvest explains the performance of frontier markets
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In his first interview since his departure, however, the fund manager looks relaxed in a blue sports jacket and checked shirt and is clearly relieved that a difficult week is behind him.
“I am hugely excited by this opportunity. It’s been a frustrating 12 months as I just want to get going with the new business,” he says. “It took me a long time to make the decision to leave because I was aware of the impact it would have on my clients, but when I decided to leave early last year I wanted to move on.”
The company, which was given regulatory approval on Wednesday, plans to launch the equity income fund in June.
The key to his strategy is buying inexpensive, unloved stocks and holding them for the long term – ideally forever, or at the very least for five years. He stresses he will not use the opportunity to reinvent himself as a different sort of fund manager. “I am going to do what I have been doing for a very long time,” he says.
The stocks he will hold in the equity income fund will be similar to those in which he invested in his flagship high income and income funds at Invesco, such as pharmaceutical, tobacco and consumer goods groups.
Mr Woodford is also fiercely opposed to mega-acquisitions, arguing they do not offer long-term shareholder value. He has a large chunk of AstraZeneca shares through his St James’s Place funds: he insists the UK company should remain a “single entity” and fight off the approach from Pfizer.
“There is short-term profit for shareholders through a deal, but there is more value in this company in the long term as a single entity.”
He will keep his distance from the swirl of the City of London, establishing his headquarters in Oxford, a few miles further upriver from Invesco, with a 20-plus strong team based in the City’s business park in Cowley.
There will be four partners, including Mr Woodford, who will be head of investments. But Mr Woodford will not take the reins as chief executive of the firm; he wants to focus on managing money.
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The other three partners are Craig Newman, chief executive, and Nick Hamilton, chief operating officer, whom he poached from Invesco, and Richard Graham Catherwood (known as Gray) Smith, who will be in charge of compliance and the legal side of the business. The company expects to receive Financial Conduct Authority approval to trade in the next few weeks.
There has also been speculation that Mr Woodford’s departure, though well choreographed, was less than amicable as he took gardening leave in March, earlier than planned, and is said to have been unhappy with the red tape and bureaucracy that got in the way of fund management at Invesco.
As head of UK equities and a 25-year veteran at the company, he considered the flagship income funds in particular as his own. Friends say it was at a meeting last year with executives in Atlanta, Invesco’s US headquarters, that he decided to quit the group, when it was made clear to him that the funds were the company’s, not his. This was an important distinction for a man who was already feeling stifled at the group.
Mr Woodford would not be drawn on this, but says: “This will give me the chance to focus on what I love doing and this is fund management. You try not to get embroiled in the bureaucracy but it is difficult not to at a big organisation.”
The 54-year-old also relishes the chance to create something of his own, a company in his image that could leave a lasting legacy for his style of investing as some of the historic names in finance have done.
His first job will be to go on the road to meet financial advisers, fund managers and investors to talk through his plans, which will start out small with just one retail fund and the segregated mandates from St James’s Place.
Stars in their eyes
Robin van Persie PUKNEWS
Is there really such a phenomenon as a star fund manager, the financial equivalent of a creative or inspirational footballer who drives a team to new heights to produce sublime or outstanding performance?
In time, however, he wants to build a bigger organisation that will offer investors opportunities to invest in fixed income and credit and may even run global and emerging market funds. His plans are ambitious, with the longer-term aim of creating a large asset manager rather than a small boutique.
It is also an opportunity for Mr Woodford to start over again with a clean sheet, particularly as his performance at the end of his tenure at Invesco was starting to suffer, which some believe was due to his funds becoming so large.
However, Mr Woodford said he “fundamentally” disagreed with the claim about his fund size and believes it is possible to perform well when running a large pool of assets.
At the end of 2013, the high income and income funds at Invesco had a combined £23bn under management. This was roughly 10 times their size a decade before, when he achieved his best performance numbers, beating the market by as much as 80 percentage points over a five-year period.
Simon Evan-Cook, head of multi-assets at Premier Asset Management, says: “It boils down to a function of how much money he takes in the fund. If he limits it to a much smaller fund than he ran at Invesco in the region of £1bn, then I think he will do very well.”
Another key question investors have to consider is whether Mr Woodford’s success has been largely on the back of Invesco, or down to his personal skill and style. His successor as head of UK equity at Invesco, Mark Barnett, has outperformed him in recent years.
However, Mr Barnett, 10 years younger than Mr Woodford, has learnt from his former boss, developing a similar style in which he places a big emphasis on analysing the macro environment before selecting stocks that typically offer high dividends and potential for growth.
Invesco probably deserves some credit for Mr Woodford’s performance, but the group also benefited from him, not only in terms of attracting assets but also mentoring younger fund managers such as Mr Barnett and establishing a distinct process for investing. It was Mr Woodford who insisted the group remain in Henley, rather than move to London.
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Mark Barnett, who is taking over from Neil Woodford as the head of UK equity at Invesco Perpetual, Henley-on-thames.
Interview: Mark Barnett
Importantly, Hargreaves Lansdown, one of Europe’s biggest online investment platforms, is backing Mr Woodford. Financial advisers say this endorsement is worth millions in terms of retail investor money as Hargreaves is one of the most popular platforms with individual savers.
Mark Dampier, head of research at Hargreaves, says: “I have been a fan of Woodford for most of my career. He is genuinely a long-term investor. He is passionate about what he does and I am sure he will continue to deliver strong returns for savers.”
Others agree with Mr Dampier, although they are not rushing to back him straightaway. Mick Gilligan, head of research at Killik & Co, the wealth management group, says: “We like situations where somebody who has a proven record starts up again with a clean sheet of paper. Whether it is repeatable, we will have to wait and see. We are going to make a decision over the coming weeks on whether we will be advising clients to switch their money into his funds.”
Dennis Hall, financial adviser at Yellowtail Financial Planning, adds: “Woodford has a great record. He went off the boil towards the end. Is that indicative of long-term decline? You never know. But you should always back someone who is a winner, and I would say he is.”
However, some financial advisers caution against the hype. “Woodford has been a good manager,” says one adviser at a big City group. “But it depends when you bought his funds. If you were there at the start, then great. But if you bought five years ago, you would have lost money.”
Mr Woodford defends his performance. “I have underperformed over the past five years, although not over the past three. My style is to buy more risk-averse and lower volatility stocks and this does not work well in a strong bull market.
“Central bank money printing has lifted all boats, but that is coming to an end. I’m looking forward to a market driven more by fundamentals and earnings, where there is differentiation between stocks.”
He also plans to develop his interest further in small, often unquoted, biotech companies that have the potential to become the multinationals of the future. Significantly, he will be based near IP Group in Oxford, the university research body that has provided some of his best ideas and themes for investing in the life science sector.
“I have immense energy and enthusiasm for this job. The fund manager I most admire is Warren Buffett and he is still going at 83. I think I have the best years ahead of me and I plan to keep going as long as I can, delivering good, steady returns for my clients.”