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Holly's Blog: Woodford faces The Furies

31 May, 2019

Neil Woodford is about as close to a household name as you get in retail investing. But the press and most analysts have progressively turned against him as his main ‘Equity Income’ fund has delivered shocking returns.

Neil Woodford is like the male Beyonce of fund management. Five years ago he was Midas. But the press and most analysts have progressively turned against him, as his main ‘Equity Income*’ fund has delivered shocking returns. Over the last 12 months, the value of the fund is down about 17%.

How do you know when to sell?

The question of when to sell an underperforming fund is one of the hardest to answer. I spoke at an event for The Telegraph earlier this year and the most common question from the audience was “Should I sell Woodford or not?”. I genuinely struggled to answer this, as the answer depends largely on why people bought it in the first place.

UK income funds across the board have had an awful time as Brexit has rumbled on. Woodford has had the worst time. He has his own particular style - he looks for cheap stocks. He holds loads of UK companies which are probably undervalued - but the endless Brexit uncertainty has punished the sector for longer than many anticipated. His fund is made up of deeply, deeply unloved stuff, metaphorical flares when everyone else is into skinny jeans. At the same time, by contrast, the big US tech firms have been having a party, shouting "whoopeeee" and going gangbusters.

Here’s the problem. Any fund investor should be a bit worried if all of their funds are doing brilliantly at the same time. Because trends come and go. and that’s why we diversify. Money is pouring into the coffers of the likes of Lindsell Train and Fundsmith, for example, both of whom have similar styles to each other. These very good managers don’t look for cheap, they look for quality. So they’re not afraid to buy pricey stuff, and fortune has smiled on them for a long time. My observation here is simply that they are similar.

And all those global share funds across the board that we’re loving? Hmm... You might think you are diversified because you own 10 different global funds, but what if 5% of all of these funds is in Apple, Microsoft, and Amazon?

At some point I suspect we’ll see a shift, and all those big global giants which we probably all hold far too much of, will have their day in the doghouse. Take Apple. Most people who could ever afford a smartphone, have a smartphone. It’s now a replacement market, not a growth market. At some point, the growth worm will nibble this Apple.

A modern media-fuelled tragedy?

There’s a modern twist at play with Woodford which I find more interesting than endless speculation about his performance. The impact of the media.

When he launched 5 years ago, his high profile took him high. But today the media has turned, and they have become as much of the problem as his performance. One leading paper has run about 5 stories on him in the last week, and most pieces are not saying anything new. Some articles are news and should indeed be reported. Some is just clickbait, because all finance writers know that if you mention Woodford or Hargreaves Lansdown in a story, more people read it. This barrage of negativity creates a structural problem.

Why? Well - the regulator wants fund managers to have the ability to pay up if investors want to bail. So lots of funds are not allowed to have more than 10% of their money in unlisted shares, which take time to sell. Woodford has had to adopt some cute strategies to stay within the rules. But here’s the thing. The unlisted stuff he owns has done quite well. So these shares become a proportionately bigger slice of the pie. At the same time, after every negative article, there’s a stampede for the doors. And when people want their money back, you need to sell shares to get cash to pay out. The last thing I want as an investor is for my fund manager to be a forced seller, especially of unlisted stuff, some of which will be about to float or potentially be acquired.

Many businesses have failed because of cashflow. Not having the right money in the right buckets at the right time. Woodford now faces the media firing squad. The more negative pieces which are written, the more outflows he has to pay out, the more he has to re-jig things in a way he doesn’t want to – and so on. Like a Greek tragedy, we just sit back and watch the inevitable unfold as the performance question is replaced by a bigger structural question.

When it comes to performance, there is nothing new to say about Woodford. He likes domestic stocks. He’s taken big bets. He’s being hammered by Brexit. He’s performed exceptionally poorly over the last few years. There are others with similar approaches who have done a lot better. He could have his future day in the sun, if you believe we’re witnessing investors behaving like sheep and seeing a more widespread global misallocation of capital. Or he might have just picked rubbish companies. The actual truth is that no-one knows what the future holds.

But what is interesting to consider is the role of the media in contributing to his pain. Judge. Jury. And potentially executioner. How this plays out will be interesting to watch.

*Translation into English: Equity is a silly way of saying shares favoured by those who also say words like ‘crepuscular’ instead of ‘at dusk’. And 'income funds' focus on paying out a stream of cash to their customers. Similar concept to getting interest on cash savings. Some of the better mainstream income funds which hold British shares will pay out about £400 a year for every £10,000 you have invested. This is because they focus on buying shares in companies which decide to pay some of the cash lolling around the company accounts, out to shareholders in the form of dividends. So the fund manager scoops up all these dividends, divvies them up, and pays them back out to their customers. If you invest in an Equity Income fund, it’s typically because you want to own some shares which might go up in value, but you are equally or more interested in getting some income paid out from these investments along the way.