The summer brought about a lot of questions for advisers and investors. Will rising interest rates end the bond market bull run? Is the US technology market a bubble waiting to burst? How will Brexit negotiations affect UK securities? But, for UK equity income investors with one of the country's most famous managers, there was a bigger question. Has Neil Woodford lost his touch?
As the summer months turned over, and temperatures peaked, several stocks picked by Mr Woodford buckled under the pressure. The £10bn Woodford Equity Income fund lost 1.9 per cent over the past year, with most of the damage coming in the past six months.
In August, doorstep lender Provident Financial tumbled 65 per cent; following its second profit warning in two months being accompanied by the news of a cancelled interim dividend, an FCA investigation into its practices, and the departure of its chief executive. This followed smaller, but significant, falls for other big holdings over the summer, chief among them AstraZeneca, Imperial Brands, Allied Minds and The AA.
Mr Woodford’s predicament raised concern from buyers and fund raters over whether he was losing his skill to pick the right stock. But according to investment analysts, the answer is more nuanced.
Key points
- The £10bn Woodford Equity Income fund lost 1.9 per cent over the past year.
- Over a three-year period the fund has returned 27.7 per cent.
- Mr Woodford apologised to investors who lost money, but defended his strategy.
Gavin Haynes, managing director of Bristol-based Whitechurch Securities, said Mr Woodford has been more a victim of his own transparency than he has been of making bad decisions.
This is because Mr Woodford goes against the grain in the industry, publishing all of his holdings and their weightings in his fund, not just the top 10 as is tradition.
Mr Haynes said: “Anyone can go on the website and see what he has invested in. People pick up on the stocks and can see they are ‘Woodford’s stocks’.”
Laith Khalaf, senior analyst from Hargreaves Lansdown, said: “I don’t think he has lost his touch. He is definitely not resting on his laurels and he would want to put this period behind him. He has had a couple of fairly high profile stocks that have performed poorly. Transparency has made him a bit of a lightning rod, but [that transparency] is a positive thing.”
Fickle sentiment of stock market investors, something potentially perpetuated by tracker funds, also means markets could be responding in more of a knee-jerk fashion to companies’ performance.
Mr Haynes added: “It seems to have been a perfect storm. We have seen a number of disappointments from his high profile stocks, but there’s no correlating theme that is feeding through the portfolio.
“Stocks that disappoint are being punished very hard and people are taking a short-term view in that they don’t want to own them. For long-term investors like Mr Woodford it can create anomalies.”
As a fund manager with a long-term view, the nature of his character means he has to sit tight and ride the road whether it is smooth or bumpy.
Mr Khalaf said: “You have a lot of people who think short term and others who are momentum traders, and who sell pretty quickly. I think all this is the more likely culprit of the extreme movement we see in stock prices.
“What [investors] are looking for is how a business will perform long term, which shows the strength of that business.”
According to Kasim Zafar, portfolio manager from EQ Investors, Mr Woodford’s period of bad luck has come at a time when stocks are being judged more on their individual characteristics than if they adhere to an in-demand sector or style. In 2016, as political volatility led the market, individual share prices were caught up in factor plays and macroeconomic uncertainty.
A change this year has created more short-term volatility for individual companies. On a positive note, theoretically it also creates the sort of market more suitable for stock pickers.
Mr Zafar said: “This year we are starting to see the market reward companies based on their individual performances. So we are starting to see stocks trade at a more volatile fashion.”
Ima Jackson-Obot is a features writer at Financial Adviser
