Equity IncomeJan 12 2017

Woodford on why benchmark beat £9.6bn fund

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Woodford on why benchmark beat £9.6bn fund

One of the most prominent names in the UK fund industry, Neil Woodford, has explained why his flagship £9.6bn equity income fund lagged behind the FTSE All Share index last year.

The Woodford Equity Income fund returned just 3.4 per cent last year, underperforming the FTSE All Share which returned 16.8 per cent over the same period.

In his latest blog, Mr Woodford admitted that the performance was disappointing and said 2016 “tested his resolve” as share prices became more detached from fundamentals.

He said it was momentum, not valuations, which pushed up share prices last year, with the rally being largely driven by a handful of stocks, most of which were in the commodity sector.

It is impossible for a truly active manager to outperform in every period Mark Dampier

Despite the shaky performance, the fund has managed to feature on the lists of most popular funds of the year. 

The fund manager, who founded Woodford Investment Management back in 2014, admitted the fund did not keep pace with the broader market, which he blamed on the “adverse” share price performance from some stocks in the portfolio.

Mr Woodford also said the portfolio’s overweight position in healthcare had caused the fund to suffer, and said many have questioned why he had not shifted his holdings as a result.

But he argued there is a lot of value being stored up in the sector, and said the market’s failure to acknowledge the progress being made in healthcare might be recognised this year. 

Mr Woodford also pointed to tech firm Capita which he said stands out as one of worst performing stocks in his portfolio, after its share price more than halved over the course of the year. 

“A series of disappointing trading updates in the latter part of the year have completely undermined market confidence in the business, and indeed, the credibility of management forecasts,” he stated in his latest blog.

He also admitted he was “disappointed and surprised” by the apparent vulnerability of Capita, but said he thought the market over-reacted to the series of profit warnings, leaving the stock undervalued.

“At times like this, it is essential that one does not compound the impact of a fundamental disappointment through an emotional reaction to a share price fall,” he said, adding his was “prepared to be patient” as Capita rebuilds its credibility.

Despite admitting market conditions were challenging after the string of political surprises, the fund manager said: “Nothing we saw last year persuades us that the portfolio should be positioned differently.” 

He described the rally across markets as “momentum-driven”, and said would continue to avoid the oil and mining sectors where dividends are still vulnerable and the fundamental backdrop for prices remains weak. 

“This positioning was unhelpful in 2016 but we’re convinced it’s still appropriate to avoid them.”

Mark Dampier, head of investment research at investment supermarket Hargreaves Lansdown, said: “2016 has been one of disappointment for Woodford investors.” 

But he said it’s important to understand why the fund has underperformed and put this into a wider context. 

“It is, in my view, impossible for a truly active manager to outperform in every period, and this shows the benefit of having a broad and diversified portfolio. 

“Woodford is a high conviction, long term investor and like other managers, he will undergo periods where his style is out of favour and we will see underperformance testing his and investor’s resolve.”

Mr Dampier pointed to Woodford’s view that if you stick with companies that have strong fundamentals, then the value for investors will come through. 

“This has worked throughout his career and I continue to have faith in him as a manager to add value for investors over the long term.”