Ask anyone in the high street to name an investment manager and they are likely to come up with one of only two answers: ‘Sorry, no clue’ or ‘Neil Woodford’. Some say 58-year-old Woodford, founder four and a half years ago of Woodford Investment Management, is Britain’s answer to US investment sage Warren Buffett, one of the few fund managers capable of outwitting the market and generating serious long-term returns for investors.
Someone who during a 26-year career at asset manager Invesco Perpetual carved out a reputation for managing money in such a way that his investors escaped the worst of the fallout from the bursting of the dotcom stock market bubble in early 2000 – and then proceeded to make them shed loads of money. The private investor’s champion. The man who made Middle England rich.
Others violently disagree, believing his investment skills to be over-hyped, a figment of clever marketing. A view currently in the ascendency given a disastrous start made by Woodford Investment Management resulting in paper losses for tens of thousands of investors who bought into two of his funds at launch – Income Focus (down 8 per cent since March 2017) and Patient Capital (down 9 per cent since April 2015).
Contrite: Neil Woodford says the last two years have been the most difficult of his career
Equity Income, the flagship fund, has fared better (up 15 per cent) but its performance is over a longer period (since June 2014) and still lags behind the FTSE All-Share Index (up 27 per cent).
The result? Money has walked out of Woodford’s door by the vault load. Assets under management across the three funds have shrunk from £17 billion at their zenith to £11 billion. In the case of Equity Income, Woodford has had to jettison holdings he would have preferred to keep in order to meet the tide of investor redemptions. Hardly the work of an investment genius. Crisis rather than fund management?
‘I’m not an investment genius,’ he retorted last week in a frank and somewhat tetchy interview with The Mail on Sunday. ‘I am just someone who follows a disciplined and rigorous investment approach. If you want to talk investment geniuses, think Anthony Bolton [former fund manager at Fidelity]. And, of course, the epitome of genius, Warren Buffett.
‘Yes, people have heaped praise on me in the past but they have also not spared me opprobrium. Everybody likes to build people up in this country and then smash them down.’ A bit like the price of his funds then – up and down. In a moment of contrition, he admits: ‘The last two years have been the most difficult period of my entire career.’ For the record, he has been managing money since 1987 when he worked for insurer Eagle Star (long gone).
Although Woodford insists he does not want to portray himself as a victim, it is obvious he is feeling unloved: targeted by a hostile press, abandoned by many investors (and some financial advisers) and victimised by hedge fund managers who have shorted some of his funds’ holdings – betting on them falling in price – knowing Woodford can do little about it but suck his thumb.
Indeed, one of his opening comments is aimed squarely at me. ‘It is interesting we are speaking now,’ he says. ‘We had a conversation some 20 years ago – just before the tech bubble burst – when you criticised me for underperforming at Invesco Perpetual. It is an article I have kept in a drawer ever since.’ One nil to Woodford.
He is right although the article in question was actually written in March 2000 – and the criticisms were not from my pen but from financial advisers who accused him of ‘intransigence’ over his refusal to acknowledge the potential of technology stocks and of his pride ‘getting in the way’. One all.
At the time Woodford steadfastly held a basket of reliable cash-generative UK blue chip shares, insisting investment fundamentals (companies being properly valued by the market) would reassert themselves and his cautiousness would be proved right.
Of course, literally as the newspaper was printed, the tech bubble burst. Woodford was right while some advisers were left with tails dangling between their legs. Two one Woodford.
There is a reason why Woodford has mentioned the article other than making me feel a little uncomfortable (I was nonplussed having heard about the contents of his drawer a few years ago from one of his former colleagues). It is because he sees strong parallels between March 2000 and now. Eighteen years ago, many company valuations had become grossly inflated, unrealistically so, resulting in a stock market shakeout lasting two years and numerous internet-based companies going out of business. Companies Woodford refused to hold.
This time around, Woodford says a number of big stocks both here in the UK and the United States – many technology companies – have seen their valuations driven up to unsustainable levels. They include the so-called ‘fangs’ – Facebook, Amazon, Netflix and Google (now Alphabet). At some stage – and it is already happening – the share prices of these companies will correct and normality will prevail. Woodford Investment Management, he says, will then come good.
Momentum investing, he says, is to blame. This is a fashionable investment process based on buying shares that have already performed well – on the basis they will continue to do so. Racing with winners.
Such an approach is anathema to Woodford. ‘It is a strategy I will not participate in,’ he says. ‘It is not based on rationality. It is designed to give share prices a momentum. My approach is all about analysing companies and assessing how good they are and what value they offer. Will they be winners or losers over the next three to five years? That is what I call active, disciplined and sensible fund management. An art I am afraid that is being squeezed out. Flawed? Yes, because you can never get everything right as a fund manager. But long term it works.’
Rather than tech stocks, Woodford is banking on investments in companies that are ‘woven into the fabric of the UK economy’ – housebuilders, building material suppliers and financial companies. The likes of Taylor Wimpey, Barratt Developments, Crest Nicholson and Provident Financial. All top 20 holdings in both Equity Income and Income Focus.
‘Some of these companies are trading at ludicrously low valuations,’ says Woodford. ‘There is a disconnect between the market and what they are really worth. At some stage that will disappear, maybe when we have a definitive answer on the Brexit question. When it does, the funds I run will benefit accordingly.’
Some organisations such as credit ratings agency Standard & Poor’s believe the UK could slip into recession if there is a no-deal Brexit. Woodford disagrees.
‘Look, the probability of a no-deal is increasing all the time,’ he says. ‘But it really does not matter either way. It will not impact on the guts of the economy, the 2.5 million businesses that make up this great economy of ours. Companies that are employing record numbers of people, paying higher wages than ever, and managing all kinds of business risks on a daily basis.’
While some may argue Woodford is clutching at straws, he is keen to point out that last month fund redemptions – investors wanting out – were at their lowest level for the year to date.
The relative performance of Equity Income against its peers has also improved in the past three months although this means it has only lost less money for investors than most of its rivals.
Even Patient Capital, an investment trust investing in some of the country’s embryonic businesses, has just won back its place in the FTSE 250 Index.
What cannot be taken away from Woodford is that he is nothing but resilient. He survived 1998 and 1999 when some called for him to lose his job at Invesco Perpetual. ‘Some of the criticism was poisonous,’ he recalls.
And he will no doubt move heaven and earth over the coming months and years to ensure that the three funds he runs are long-term successes. The fact that most of his wealth, apart from the family home in Gloucestershire, is tied up in the funds (‘skin in the game’) should reassure investors.
‘I’m made of tough stuff,’ he says, as he draws our conversation to an end. A point reinforced by Alan Steel, chairman of financial adviser Alan Steel Asset Management. ‘On a recent visit to our office, I’ve never seen Neil so determined to get through his disappointing period,’ he says. ‘You wouldn’t bet against him.’
Maybe he does not help himself by allowing investors, rivals, hedge funds and even nosy journalists to see all the companies he holds in each of the funds – and pick over ‘mistakes’. It is a level of transparency other investment houses refuse to offer.
Genius? Opportunist? ‘Successful private investors have moved beyond the cult of the fund manager,’ says a sceptical Brian Dennehy of fund scrutineer FundExpert. ‘My advice to Woodford investors is sell, sell, sell.’
But probably the most balanced view of Woodford comes from Patrick Connolly, a chartered financial planner with Chase de Vere. ‘He has been over-hyped when he has performed well and heavily criticised when he has done badly.
‘To quote England football manager Gareth Southgate: ‘We’re not as bad as some think we are when we struggle and we’re not as good as others say we are, even when we succeed.’ This seems to be a fair reflection of Neil Woodford.’
Me? I think Woodford will come good again. He’s a street fighter who does not like to get beaten. He triumphed in 2000 and I am sure he will again in the near future. Put this article in your drawer, Mr Woodford, and let’s talk about it in 2038.