Neil Woodford has long been warning of a bubble in stock markets, but if the heavy sell-off last week is the first sign of it bursting, he’s not profiting just yet.
It’s a month since the FTSE 100 closed at an all-time high of 7,779 points, with the UK blue-chip index having fallen around 7.6% from that point, in a decline that accelerated dramatically last week as US markets tumbled into correction territory.
Woodford had warned that stock markets were in bubble territory at the end of last year, claiming there were ‘so many lights flashing red that I am losing count’.
But the swift change in market sentiment hasn’t delivered any respite for the manager, who is enduring one of the most difficult periods in his fund management career.
Since the FTSE 100 hit its peak, Woodford’s flagship £8.3 billion LF Woodford Equity Income fund has fallen 9%, the biggest loss of all but one other fund in the 86-strong UK Equity Income sector.
Woodford Investment Management outlined its belief in a stock market shake-up earlier this year in a series of posts on its website, highlighting four key calls.
The first of these, that the end of ‘easy money’ for markets through the unwinding of quantitative easing and interest rate rises from the US Federal Reserve risked a stock market correction, has proved prescient.
Woodford’s positioning is also based on the belief that China’s growth will slow, the UK economy will perform better than expected, and that markets will change course to reflect all this in 2018.
Woodford's poor run continues into 2018
But as stock markets sold off over the last month, Woodford was forced to contend with yet more disappointments from some of the stocks which delivered him the most pain last year.
Shares in Capita (CPI) have lost more than half their value over that period, as the troubled outsourcer delivered another profits warning, announced a rights issue, suspended its dividend and said it would sell assets to plug its pension deficit.
Provident Financial’s (PFG) 25% slide over the last month has meanwhile gone under the radar, as investors have steadily fled the embattled lender following a disappointing trading update.
But it will have had a bigger impact on Woodford’s fund than Capita’s headline-grabbing crash, with the lender still a top 10 position in the fund. So too is Prothena (PRTA.O), the Nasdaq-listed biotech company whose shares are down 26% over the last month, hurt by the resignation of its chief medical officer after just nine months in the job.
The only UK Equity Income fund to have lost more over the last month is the £53.9 million Smith & Williamson UK Equity Income fund, as new lead manager Mark Swain was handed a baptism of fire following the departure of Tineke Frikkee.
The rotation Woodford believes will happen towards ‘value’ stocks remains elusive, as shown by the UK-focused fund managers suffering with him in the sell-off.
Managers with a value or ‘recovery’ style struggled, with Andrew Hunt’s £42.5 million Standard Life Investments UK Equity Recovery falling 10.5% and Tom Dobell’s £2.9 billion M&G Recovery dropping 9%, among the worst performers in the UK All Companies sector.
‘Defensive’ stocks like consumer staples broadly lived up to their name. They helped Nick Train and Michael Lindsell limit losses on the Lindsell Train Global Equity fund to 2.4%, one of the best performances in the Global sector, while Terry Smith’s giant Fundsmith fund was down by just under 5%, a better result than for most others in the sector.
Gold's puzzling fall
The UK fund to have suffered the heaviest loss of all over the last month may come as a surprise. The tiny £11.5 million HC Charteris Gold and Precious Metals fund fell nearly 16%, highlighting gold’s failure to live up to its safe haven status amid the sell-off.
After falling to just over $1,240 an ounce in early December, gold rallied alongside bullish stock markets, losing steam only towards the end of last month as US markets peaked. The precious metal then proceeded to follow stock markets downwards, albeit not as precipitously, losing 2% over the last month.
The Charteris fund invests in gold miners, rather than gold itself, as well as silver miners, shares of which tend to amplify the movement of the metals they target.
Gold appears not to have been immune to the broader slump in commodities as part of the sell-off, despite the market turmoil having been driven by fears over higher inflation, an environment in which oil and metals tend to thrive.
The five funds hit hardest by the stock market slump are all commodities focused, and have all endured double-digit losses. They include LF Canlife Global Resources, Investec Global Energy, Artemis Global Energy and First State Global Resources.
While few fund managers have escaped losses in the past month, among UK-focused stock pickers at least, most have managed to limit losses compared to the wider market. UK tracker funds have been among the worst hit, with the likes of the Scottish Widows UK Tracker fund and Marks & Spencer 100 Companies fund among the worst performers in the UK All Companies sector.
The sell-off has also provided an opportunity for some famously bearish fund groups to shine. Among the few funds to deliver positive returns over the period were a clutch managed by Odey Asset Management, the fund group founded by Crispin Odey.
That ultra-bearish stance has been reflected in the funds which carry his name, which have been hit hard as markets have rallied. The Odey Swan fund is down 53% over the last two years, while the Odey Odyssey fund has lost 27%.
Long-suffering investors in the Odyssey fund have gained some respite in the sell-off. Up 11%, it’s the best performing fund available to UK investors over the month. The Odey Swan fund is up 5%.
Broad stock market sell-offs are particularly suited to funds, like Odey’s, which are able to ‘short’ shares, and make money from them falling.
‘As we enter 2018, the market continues to have a very strong momentum,’ he said. ‘It looks increasingly possible that a change in market direction will come more suddenly. We believe this is a plausible scenario, as low volatility brings more and more participants into the market and encourages the use of leverage. A small change in sentiment could cause selling, which could then be exacerbated due to current market structure.’
A heavy short on the US market will have boosted returns as the Dow Jones tumbled into correction territory. The fund is the best performer by a long strecch in the Investment Association’s Targeted Absolute Return sector over five years. It is up 93%, although returns have been volatile, with the fund losing 20% in the first half of 2016.
BlackRock Emerging Markets Absolute Alpha was another ‘absolute return’ fund to do well. Up 2.1% over the period, its ‘short’ positions on tumbling technology and financials stocks helped.