Manic re-rating and the drama of departure

Once everyone got over the initial shock – (he’s done what now? Really? SERIOUSLY?) – the flurry of re-ratings and analysis suspensions came flooding in. ‘ON HOLD’ screamed several press releases. ‘UNDER REVIEW’ shouted several more. While some reclined (with a slightly smug air) saying, ‘Hang on, guys. Let’s all chill out. We’ll make a decision on re-rating or otherwise once we’ve had a chance to look at succession plans. Calm yourselves down.’

But what is the correct response in such a scenario? For any analyst that has advocated buying Woodford’s funds – with all the usual this-is-not-a-personal-recommendation caveats – a manager departure is a big blow. However, logic tells us that any individual who has outperformed over periods of time must have had at least a little luck along with their own personal hunches, not to mention the often immense infrastructure behind them providing data and analysis.

The problem is, as an investor, you never quite know what the division is between lucky guesses, on-point analysis and support from elsewhere. Which inevitably leads to a (perhaps unhealthy) over-reliance on the name, the face, the star of the show.

No one is going to deny Woodford’s track record. But, as shown by our analysis of the UK Equity Income sector yesterday, there are success stories beyond him. They may not turn out to have the longevity, they might make different calls, or they might turn out to be even better than his funds in 20 or 30 years’ time.

If we are to believe in the doctrine of asset allocation, other fund managers in this sector must be rubbing their hands together in glee as they await mass inflows from investors who don’t want Invesco Perpetual if they can’t have Woodford. But he’s off to set up his own company, the details of which are yet to be revealed. What if he decides to branch out as Anthony Bolton, the only manager to enjoy anywhere near Woodford’s billing in recent years, did in launching a Chinese version of his flagship special situations fund? Bolton’s name was the newly launched fund’s only real selling point, despite him having no track record outside of the UK. While not a disaster, the returns never got close to the stellar performance his previous vehicle had consistently achieved during his tenure.

If Woodford does decide to get into Turkish equities, or Mexican forestry, or investing in space travel, should loyal investors follow – even though the type of investment would be completely different – or do they acknowledge that if a UK equity income fund suited their needs when he ran the fund, then a UK equity income fund (potentially even the same one run by a new person) is still likely to be the best fit?

Investors are not always logical, are often driven by emotions and do not necessarily see reason. Advisers have the job of keeping their heads screwed on, even if madness ensues everywhere else.