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Woodford wobbles: should investors be concerned?

Written by: Paloma Kubiak
Investors have been left disappointed by the performance of star fund manager Neil Woodford’s Equity Income fund in recent weeks. But is any concern justified?

The CF Woodford Equity Income fund which aims for income and capital growth, has seen inflows of nearly £10bn since its launch in June 2014.

However, two of veteran Neil Woodford’s top 10 holdings have left investors hugely disappointed; shares in pharmaceutical company AstraZeneca, of which Woodford has an 8% holding, fell 15% on the day of its failed Mystic drug trial last month – though it has recovered slightly, down to -10% since then.

And shares in doorstep lender Provident Financial (4% weighting) tumbled by as much as 75% on the day it revealed it expected to make a loss of between £80m and £120m following a significant fall in sales and loan collections this year.

According to FE Trustnet, the fund’s cumulative performance in the last three months has dropped 7.2% (up to yesterday) and 2.3% in a year.

However, over the three years, it returned 27.99% while the sector average – the IA UK Equity Income Sector – was 24.54% (see graph below).


Source: FE Trustnet

The message for investors

We spoke to four investment experts to find out what their message is to investors:

‘I wouldn’t be worrying too much yet’

James Yardley, senior research analyst at Chelsea Financial Services, said investors really need to judge Woodford on his long-term performance.

“All managers are going to have stocks which do poorly and have periods of underperformance. Despite a tough period, Woodford’s fund is still comfortably ahead of the market and average fund since it launched. You are still up 28% since the fund launched three years ago.”

Yardley reminds investors that Woodford has had periods of very poor relative performance in the past.

“In 1999 his Invesco Perpetual fund lost 24% in just nine months while the average fund was up 3%. However, it would have been a bad decision to sell the fund at this stage as Woodford went on to have an incredible period of outperformance over the next couple of years.”

He added that while the fall in Provident and Astra Zeneca are “obviously disappointing”, he wouldn’t worry too much just yet.

“One thing I would say is this does highlight the importance of having diversification in a portfolio. There are a lot of good fund managers and if you have a good mix of funds you will feel it much less when one of them has a bad period,” he said.

‘He has found more winners than losers over the long-term’

Ryan Hughes, AJ Bell’s head of fund selection, said clearly Woodford is having a tough few weeks with a small number of his holdings hitting the buffers but it’s important investors don’t simply draw judgement on a few troubled stocks.

“A look at his long-term track record shows exceptional performance with strong outperformance compared to his peers despite this recent blip, indicating that he has found more winners than losers over the long-term.

“It should be remembered that all fund managers have companies that go through problems from time-to-time and with Woodford’s profile, his holdings are likely to be highlighted more than most. It is easy to draw criticism when some of these issues come in quick succession but investors should remind themselves of Woodford’s style. His approach is to look for companies that he perceives the market is significantly undervaluing which results in him targeting companies others are shunning.

While Hughes acknowledges that this approach doesn’t always work, this is a risk that comes with the Woodford approach.

“No fund manager has an investment process or style that works all of the time and in every market, and despite Woodford’s exceptional long-term track record, he has had challenging periods before.

“Times like this are a reminder that investors should fully understand a manager’s style before they invest and also be patient. I continue to rate Woodford very highly and he continues to appear on the AJ Bell Favourite Funds list. For those comfortable with Neil’s long-term approach, this may even be an opportunity to top up.”

‘Patience is a virtue when it comes to successful investing’

Nick Dixon, investment director at Aegon, said deep scrutiny placed on the Woodford Equity Income fund is a product of the fund’s success.

“Woodford has a long track record of strong performance and, while the fund has under-performed over 2016/17, investors should look at performance over longer time periods.

“Patience is a virtue when it comes to successful investing. So is contrarian thinking – part of Woodford’s long-term record was driven by contrarian positions which led to short term blips, e.g. underweight technology in 1999/00 and underweight banks in 2005/07.”

Dixon said now is probably not the time to move from Woodford as this week’s bad news is already priced into the fund’s assets.

He added: “More importantly, successful fund managers tend to be those with courage to stick with their convictions and ride out periods of under-performance.”

‘We continue to support his fund’

Sheridan Admans, investment manager at The Share Centre, said it’s not the first time Woodford has had to manage market reactions to company releases and time and again he delivers on his long-term mandate.

“We have no reason at this time to doubt his capabilities and continue to support his fund. We recognise that all fund managers are at risk of having some blow-ups in the portfolios over time and Woodford is not immune to this. He’s provided a rational and logical communication for the event. Investors should be confident that Woodford is a manager who can demand the time of the key individual of the companies he invests in at time of crisis, and communicate his findings accordingly and in a timely manner.”

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