A year from now, the remaining investors in the Woodford Equity income fund may find themselves remembering the 1997 slasher film I Know What You Did Last Summer with a similar cold sweat as they consider this year’s Neil Woodford stockpicking horror show.
It all started in late June when US regulators announced that they wanted to cap nicotine in cigarettes. The market reacted badly, pushing share prices of Imperial Brands and other UK-listed tobacco companies to a two-year low. Mr Woodford has had a preference for the tobacco industry for a while, but did cut back earlier this year. He retains a 6 per cent exposure to Imperial Brands, however.
July brought further bad news around Mr Woodford’s holdings in pharmaceuticals and biotechnology. Similar to tobacco, he favoured these industries where it was no longer about creating one revolutionary product, but regularly selling products to recurring customers, generating consistent cashflows and dividends.
This summer was a reminder that business models still depend on the success (or failure) of the trial tests.
Theravance Biopharma (Mr Woodford being the largest shareholder) announced mixed results from its Phase 2b study of a new drug for diabetes. AstraZeneca (the fund’s largest position), saw its share price fall by 15 per cent because a key lung cancer drug flopped in clinical trials. We can also quote the fall in the share prices of 4D Pharma (largest shareholder with 27 per cent), and Prothena.
Mr Woodford’s exposure is almost 30 per cent in this sector, relative to 8 per cent in the FTSE All-Share. This is a large relative industry bet that needs to be taken into consideration before investing in Woodford funds.
The bad news over the summer was not limited to those two sectors. The AA (Mr Woodford being the largest shareholder with 10 per cent), fired its executive chairman Bob Mackenzie and warned of a hit to earnings, sending its share price to a record low. Allied Minds (Mr Woodford is the second largest shareholder), announced a $147m (£114m) writedown on the value of seven of its portfolio businesses. Provident Financial’s huge decline is simply the cherry on a rather unappetising cake.
Due to the poor stockpicking, investors in Woodford funds have now experienced their second worst period of performance. Returns relative to UK Equity Income peers stood at -7.3 per cent for the year as of last week. The manager has only previously experienced this kind of underperformance in the fourth quarter of 2009 and the first half of 2010.
Then, the reasons were largely different – the fund failed to perform in 2009 as the manager was not exposed to the best performing industries. Today it is all about stockpicking. It is also a reminder that the manager takes large industry bets, which have worked well over recent years. But the thesis has since been eroded.
The summer of 2017 also brought dissatisfaction with his passion for unquoted companies. It is known that Mr Woodford has recently expressed a strong interest in capital ventures. With his office being located near to Oxford University, he is best positioned to assess the buoyant British entrepreneurship spirit there.