Why you can still bet on Woodford

Stock picking legend is in a slump but here’s . . .

TAR fund manager Neil Woodford is about to mark three years since the launch of his Woodford Equity Income fund – the flagship investment he launched at his boutique firm.

The manager’s first launch at his own business raised a record £1.6bn before opening, and now runs more than £10bn of investors’ assets.

Although this suggests that the pull of the Woodford brand remains strong, many have accused the veteran of losing his touch in recent months, following company-wide under-performance throughout last year and the beginning of 2017.

So three years on, how is Woodford really faring on his own?

Since the launch, the Equity Income fund has returned 36.2pc to investors, more than every single one of its rival funds. It has also outperformed the High Income fund which Woodford left at Invesco Perpetual, which has returned 25.2pc over the period under successor Mark Barnett.

Likewise, with the fund continuing to offer a 3pc yield in the current low-interest rate environment, investors’ enduring faith in the manager seems more than justified. But it’s worth noting that performance has struggled more recently. The fund has returned just 15.4pc over the last year, below its peers’ average return of 18.5pc, according to FE Analytics.

Darius McDermott, managing director at Chelsea Financial Services, said periods of underperformance are part and parcel of being a fund manager.

With nearly 36pc of Woodford’s fund invested in the healthcare sector – his favourite stocks include AstraZeneca and GlaxoSmithKline – McDermott argued that Woodford’s short-term performance can be traced to the market rather than his skill as a stock picker. He said: ‘It isn’t unu- sual, even for Neil, to have a period of time when things don’t go as well.’ Likewise, Paul Derrien, investment director at Canaccord Genuity Wealth Management, said a year is not long enough to truly gauge a manager’s skill, with three years providing a more appropriate time horizon.

He said: ‘Woodford’s long-term track record speaks for itself.’

A blip in performance is one thing, but with the manager’s Woodford Patient Capital trust underperforming every single one of its peers since its launch, losing 8.6pc of investors’ money against an average return of 21.4pc, some have accused the manager of biting off more than he can chew.

Woodford’s decision to recently begin managing a third fund on his own – his Income Focus fund launched in March – has only fuelled claims he is struggling to cope without the benefits that come from the backing of a large investment house like Invesco. But Thomas Becket, chief investment officer at Psigma Investment Management, said Woodford would likely argue that he has done this job for decades – he became a fund manager in 1987 – and has had great success.

When it comes to Woodford’s positioning in an investor’s portfolio, it’s important to remember the manager has carved a reputation for a defensive style of investing, which does not always lend itself to double digit returns.

Rather than cashing in on the latest trend, Woodford creates a concentrated portfolio of stocks with good income characteristics and strong cash flow. This skews him heavily towards stocks such as tobacco and pharmaceuticals, which can often miss out on entire market rallies in favour of more subdued long-term growth. Accordingly, he avoids the everyday volatility of sectors such as mining and oil, where one bad bet can ruin a managers’ reputation.

Adrian Lowcock, investment director at Architas, said: ‘Woodford has made significant investment decisions based on longterm potential, and to outperform the market longer term you must invest in something different to everyone else and risk short-term underperformance.’

While much of one’s opinion on Woodford ultimately boils down to what they want from an investment, it’s hard to argue that his move to the boutique side of the fence has allowed him to shake up the UK’s asset management industry. By taking steps to fully disclose all of his stocks, scrap staff bonuses, and self- fund research payments, Woodford has eschewed an industry often accused of being old fashioned lacking transparency.