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Can Neil Woodford recover from his worst ever spell?

Citywire head of investment research Frank Talbot analyses Neil Woodford's 30-year career to answer the question: should you really be betting against him?

Can Neil Woodford recover from his worst ever spell?

Let me start out by saying that I have long been a fan of Neil Woodford.

Each and every time the quality of his management has been questioned, after a rocky year or two, and sharks started circling, I have pointed to his track record and he has always come out on top.

The sharks are most certainly circling now. Over the past three years until the end of October, his eponymous Equity Income fund has fallen 8.3%, while the FTSE All Share has gained 25.4%.

His struggles are highlighted by Citywire's ratings data, which shows he has not been able to regain his rating since losing it 15 months ago. However, he has still qualified for a rating 144 times out of a possible 194 (see below). 

AAA rated months AA months A months + months
61 35 44 4

 

The fund now stands at less than half of its peak size of £10.2 billion. What has happened to the UK’s most famous fund manager and is there precedent for this level of underperformance in his storied career?

The short answer is no. To underline this, we have examined Woodford’s entire track record using Citywire’s unique fund manager data.

This is the first time Woodford has underperformed over a full three-year period since the beginning of his career, which now spans more than three decades as named manager. During this time he has created immense wealth for the millions who have invested in his funds.

In fact, he has returned an eye-watering 2,859% since taking over management of the Invesco High Income (UK) fund in October 1988. In the process he has destroyed the FTSE All Share and the average manager’s returns of 1,197% and 1,253% respectively.

His 30-year anniversary was in October, but I very much doubt the champagne was being popped down at Woodford HQ. Yet it probably should have been. The rarity of a 30-year career cannot be understated, and it puts him well inside the top percentile.

Yes, there is survivorship bias in that. But his length of survival tells you all you need to know about his quality over the years.

A rare gem

Until his recent underperformance, he had actually outperformed the benchmark and the average manager in each and every discrete three-year period of his career. He was one of just 33 managers worldwide to have achieved this feat with a career of 15 years or more and still active today.

In fact, he was the longest serving of all of them by over a decade... a rare gem.

He has really fallen on hard times, though, underperforming in each of the past three discrete 12-month periods of his career, beginning on 1 October 2015. Not only that, but they have been his worst ever, lagging the All Share by 6.5%, 11.3% and 15%.

Prior to this, he only ever had a sequence of two 12-month terms of underperformance between 1 October 2008 and 30 September 2010, during which time he returned 18.6% while the All Share rose 24.6%.

This was hardly a shocker, though, during a difficult time for the markets.

But I remember even back then, there were questions on whether or not his days were numbered. Particularly because of his reluctance to invest in the banks as they recapitalised after the financial crisis and performed extremely well.

Yet just when he needed it most, his huge and long-standing bet on pharmaceuticals and continued faith in tobacco stocks were rewarded during a period when ‘expensive defensives’ reigned supreme.

Then, though it might be hard to remember, when he decided to go it alone life started out really well, and he enjoyed a strong 18 months. Since then, however, very little has gone right. His decision to back the strength of the UK economy and by extension UK domestics in a post-Brexit referendum world is yet to pan out.

On top of that, in 2017, he endured a series of stock-specific issues in Allied Minds, AA, Next, Capita, Imperial Brands and Provident Financial; the latter two of which continue to occupy top 10 positions of 4.3% and 8.5%, respectively, in the portfolio despite dwindling share prices ever since.

Can he pull off another turnaround?

The problem is that things would really need to go Woodford’s way for him to turn this around in the near future. We would have to have a sharp Brexit relief rally and a restoration of confidence in the strength of the UK economy.

His bets on fledgling biotech and unquoted companies would also have to start paying off. Not all of these are connected, though.

The thing is, there are equity income players who are arguably better placed to prosper once a resolution to Brexit materialises, such as JOHCM’s Clive Beagles and James Lowen.

It is unfortunate that Woodford’s period of underperformance coincides with his decision to leave Invesco to set up his own shop. In fact, since then he has only outperformed the All Share during his first full 12-month period from 1 October 2014.

This has made it easy for critics to question whether or not he has had the resources at his disposal to outperform and if any outperformance at the beginning was down to legacy research from his days at Invesco.

The elephant in the room, of course, is his successor at Invesco, Mark Barnett. But he has not done well either. Since Woodford Equity Income launched on 2 June 2014, it has returned 13.2% on the A-Share class, to the end of 6 November 2018. This compares to Invesco High Income’s return of 12.9% and Invesco Income’s 10.8% over the same period.

It is a mini victory though between two struggling offerings when compared against the strength of the FTSE All Share’s 23.9% gain.

Barnett, though, has not endured the stock-specific issues Woodford has had in the past 18 months, so has performed considerably better. Since Woodford’s fund peaked on 20 June 2017, he has given up 18.6% compared to Barnett’s losses of 11.1% and 11.3% on the High Income and Income funds respectively – both of which look turgid compared with the All Share’s small loss of 0.4%.

At this point, should Woodford pull off a turnaround it would undoubtedly be his biggest coup to date – and betting against an individual who has achieved what he has, as consistently as he has is a bold call.

But how many investors will still be around to witness that? 

To assess Woodford’s long-term performance, we have taken into account every portfolio he has run in the equity income sector since October 1988, including those he ran for Invesco, St James’s Place and latterly at his own shop. In the periods that he ran more than one mandate concurrently, within the same peer group, an average of the performance of the funds was used.

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