Let’s talk about Woodford

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Neil Woodford is a star fund manager; at Invesco he ran several flagship funds and was the poster boy of the investment industry. As things appear to start to unravel it is worth perhaps just outlining the importance of research.

DIY Investing

The Woodford Fund has seen assets fall from over £10 billion to about £3 billion in a relatively short period of time. One of the single largest holders of assets is Hargreaves Lansdown, and under that will be several thousand individual investors.

We have no issues with DIY investing, but doing so via the likes of Hargreaves Lansdown doesn’t devoid investors of doing research. The problem is that Hargreaves Lansdown heavily promoted the fund and referred to his past success.

This is not the first time this has happened. Anthony Bolton managed the hugely successful Fidelity Special Situations Fund before retiring in 2007. In 2010, he returned to manage the Fidelity China Special Situations with little or no experience of the market or culture. Again, this was heavily promoted; raising significant funds and then flopped.

So where does it lead investors?

Doing the leg work

There are several reasons why we never invested in the fund. These are some of them:

  1. Just because a fund manager has been successful in one place it doesn’t mean he can replicate this. We feel it is sometimes better to sit back and wait before investing
  2. The performance of the Income Fund over the five years up to the point he left Invesco was no better than a passive income fund and paid less income. The point was that performance had started to slip
  3. In our view the only reason why someone would set out on his own would be to replicate the previous success; to do this would require a significantly smaller fund, and this was not the case
  4. The fund holds around 120 stocks, some of these are small and illiquid; not all investors knew or understood this. The question in our mind was, is this is a private equity vehicle or an income fund? It was unclear what Woodford was looking to achieve
  5. Woodford is a one man show; this brings significant risk

These are the things we will look at when backing a fund; we don’t always get it right. For example, we invested in a Total Return Fund from GAM. The manager was successful at his previous company, GAM seemed a perfect fit and provided additional resource, and after several meetings we decided to invest. The fund closed within two years.

This showed that sometimes it is better to sit back and wait, although where it has worked, was with Artemis where the whole US team moved from Threadneedle to set up a new franchise. This team have managed to replicate that success.

We are not saying that Woodford is a good or bad manager. What we are sharing are some thoughts when the move was announced. Woodford could still prove to be an excellent manager once again, but it remains a fund that we would avoid.

So, what do we learn from this?

It is worth looking at Mark Mobius who worked for Templeton for many years and has recently set up his own company specialising in Emerging Markets. The big difference he has a team around him, with significant support and you feel that although the company carries his name the team is as important. Again, we wouldn’t invest until we start to see the performance and style of investment, but it is important to look at the whole package.

There are several boutique fund managers who we have met who are excellent but one of our concerns is the size of the company, and the fund manager risk associated with this. As an individual investor you might consider taking on this risk but when managing several clients, you need to think very carefully.

We carry out somewhere in the region of 100 fund manager meetings a year and invest in around 30 to 40 funds for our clients. Meeting fund managers is important to understand the fund, their style and where it might fit. It is also an important to network; sometimes we can get introductions to funds that have not come across our screens.

Performance plays a part in selecting funds. You can’t have a fund that consistently underperforms the index because you would question why you would pay the extra for it. But like investing in shares you can sometimes uncover hidden gems which just seem cheap and out of favour, and you might hold a handful of these.

But for us what we need to do is match what is coming out of the fund manager’s mouth with, what the research shows; there is, of course, an element of gut instinct in this; does it smell right?

But there is no magic formula. We can’t pick funds just on performance or a star manager etc because we are more than likely going to get it wrong. Doing the research is the only way we stand a chance of getting it right.

Do we get it right?

Over 12 months we can sometimes see under 50% of the funds beating their benchmark, in fact we have seen this dip below 20% particularly in periods like 2011, 2016 and 2018. However, over 3 years this can rise to over 80% outperforming the index.

If we can get a hit rate around 80% or more, then we know we can add value for our clients. We know there will be periods where it will be lower but fundamentally doing the research, talking to people and meeting managers will always be the way that we can deliver that outperformance. Is it an easy job? No.

It can be very tempting to be sucked into the spin behind new funds like Woodford’s or Bolton, but experience and past mistakes have taught us that waiting is often the safest bet.

Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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