‘The clue is in the name . . . investors must be Patient’
Star fund boss Neil Woodford is defiant as £750m trust slides
This is the most attractive asset class I’ve ever analysed
NEIL WOODFORD is one of the few investment managers that investors have ever heard of. He earned his reputation at asset manager Invesco Perpetual, protecting investors’ portfolios from the worst ravages of the bursting of the dotcom bubble in 2000. Four years ago and after more than 25 years at Invesco, he set up his own company Woodford Investment Management and has since launched four funds bearing his name. But it has not all been plain sailing – and some investors are getting agitated. ON the 42nd floor of a skyscraper in the heart of the City of London, ambient lighting and sultry background music make it feel more like a trendy bar in the Balearics than just another office block.
It is 10.30 on a midweek morning and the room is filled not with festival goers or holidaymakers, but professional investors.
They have come to listen to Neil Woodford, the founder of Oxfordbased asset manager Woodford Investment Management and an individual who in his time has been compared with the legendary Warren Buffett for his ability to pick winning stocks.
What binds these investors is that they have all put money in Woodford Patient Capital Trust, one of four funds that Woodford has launched since going it alone in 2014.
All three funds that are available to UK investors – Woodford Equity Income Feeder is an offshore fund – have got off to indifferent starts.
Since launch in June 2014, Woodford Equity Income has returned a tad over 20 per cent, below that of both the average performance for rivals and the FTSE All Share. Nervous investors have pulled millions out of this fund which has seen its assets drop from more than £10billion to just £6.1billion.
Woodford Income Focus, launched in April 2017, has similarly underperformed, albeit over a shorter period of time. But it is the performance of £750 million investment trust Woodford Patient Capital that stands out like a sore thumb.
Shares in the trust, which invests in early-stage businesses, are down 21 per cent in price since launch in May 2015. The slide in the trust’s value has culminated in it being ignominiously relegated from the FTSE250 Index. Many investors are disappointed. Extremely upset in fact, especially given some investors were prepared to pay a premium for shares in the immediate aftermath of the trust’s launch. Patience is wearing thin.
At the investor meeting in London, Woodford is nothing but defiant. He says: ‘We never promised instant returns. We said to judge us on our three to five-year outcomes – the clue is in the name, this is the Patient Capital Trust.’
While investors have lost money – on paper at least – Woodford has yet to draw a fee from the trust. The charging structure means he can only take one if the trust grows the value of its assets by ten per cent a year. He adds: ‘We didn’t expect to get paid at this stage. We said we would spend the first years building stakes in exciting businesses which is what we have done.’
The bad news emanating from some of the companies Patient Capital invested in has been relentless. Shares in American biotech firm Prothena – of which he owns 29 per cent – plunged 70 per cent after it decided to discontinue the development of its lead drug.
Shares in intellectual property firm Allied Minds – in which he has a 27.5 per cent stake – are down more than 50 per cent since last November after it disposed of seven subsidiaries.
Woodford says: ‘We know not everything will work and there will be things we get wrong. But when it does go wrong that does not mean we abandon ship and run away from the investment. Every company has moments when they have to take stock and reshape the business.’
It is not the first time Woodford has fallen out of favour. He came close to being fired at Invesco Perpetual when he refused to buy fashionable internet companies in the run-up to the dotcom bubble of the late-1990s. When the bubble burst the manager was vindicated. Once more, he is sticking to his guns.
Woodford says: ‘I could not be more confident that we will deliver on what we said three years ago when we launched Patient Capital. There has been quite a lot of commentary and the focus of that has been misjudged. We said we would deliver over a three to five-year period and we have only just got to the three-year point.’
There have been a number of investment successes. They include DNA sequencing firm Oxford Nanopore which was founded out of the Oxford University chemistry department and now has thousands of customers across 70 countries. It used its technology to identify a new strain of the deadly disease Ebola during the 2014 outbreak and work out where it was emanating from (Africa). The trust has also backed Proton Partners which recently opened the UK’s first ever Proton Therapy centre in Newport, South Wales. The firm uses innovative technology to treat cancer. It hopes to be able to diagnose the disease in 24 hours. The current average in Britain is more than 60 days.
Woodford says: ‘We are investing in businesses we think will change the world and this is the most attractive asset class I have ever looked at, analysed or invested in.’
The star investor accuses the UK fund management industry of treating early-stage science and technology companies like a ‘leper colony’.
But he praises the Government for its recognition that there is a need for funding in the sector. In the November Budget, the Government promised to make funds available to technology firms looking to scale up their business operations.
Certainly, Woodford’s investees appreciate his long-term approach. Mike Moran, chief executive of Proton Partners, says: ‘The investment from his trust let us start building a network of centres and the first patient in the UK has now been treated.’
While the firms’ technologies would require a PhD to understand, Woodford decides where to invest based on ‘good old human relationships’. He says: ‘It is the same as when we invest in any other business. We do a lot of due diligence and we look for world-class people and world-class technologies.’
FEW equity income investment funds have enjoyed more success over the past decade than M&G Global Dividend. Launched in the teeth of the 2008 financial crisis, the fund now has assets under its wing of £6billion – a big sum compared to most investment funds. An investor who supported the fund from launch would have tripled the value of their outlay.
Yet it is the relentless commitment to dividend growth that stands M&G Global Dividend apart from the crowd of dividend-friendly investment funds vying for investors’ money. Every year it has managed to grow the dividends it hands over to investors.
This is no mean feat given the fact investment funds do not have the flexibility of rival investment trusts that can squirrel away surplus income in good years to top up dividend payments when times get tough. All the income that the fund earns from its holdings must be paid to investors almost straightaway by way of quarterly dividends.
The individual at the helm since launch has been Stuart Rhodes. He says: ‘I am pleased and proud of what has been achieved on the income front. We have stayed constant in terms of what we do and never veered off course. Growing the fund’s income is a key target.’ More importantly, he believes that the fund’s income payments can keep growing in light of a healthy dividend backdrop worldwide.
Already this year, some 29 of the fund’s 42 holdings have announced dividend uplifts, ranging from the one per cent increase declared by Swiss healthcare company Roche to the 43 per cent increase in the quarterly dividend just paid by American bank JPMorgan Chase. Not one of the fund’s holdings has confirmed a cut while 11 have revealed dividend increases in excess of 15 per cent.
‘It is a pretty healthy dividend outlook out there,’ says Rhodes. ‘Outside some of the mega stocks such as Amazon and Netflix, you can still find a multitude of stocks with yields in excess of three per cent, an ability to grow their dividends and sitting on attractive values.’
American semiconductor business Broadcom is indicative of the companies Rhodes likes. It is cash generative and has rewarded the fund with a stream of increasing dividends since a stake was taken in the company five years ago. Whenever the shares dip in value, he likes to top up the holding. As a result, it remains one of the fund’s five biggest positions.
For the past couple of years, John Weavers has been helping Rhodes run the fund. Weavers, who also manages M&G North American Dividend, keeps an eye on Global Dividend’s holdings in the United States that amount to more than half the fund.
‘The United States has a big dividend culture,’ says Rhodes, ‘which many investors in the UK fail to recognise. There are companies out there such as Johnson & Johnson which have enjoyed 46 years of annual dividend growth. It is these companies we are seeking out.’ Some 13 per cent of the fund is in UK companies with tobacco giant Imperial Brands being the largest holding. ‘Yes, the UK remains a great market for dividend hunters,’ says Rhodes, ‘but there are plenty of other investment opportunities elsewhere in the world.’
Investment trusts with a similar international remit to M&G Dividend Growth, but with annual income growth records extending beyond 50 years, include Alliance, Bankers, Brunner and Foreign & Colonial.