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01 June 2018

A game of skill or luck?

There has been further turmoil for star fund manager Neil Woodford as his flagship fund, the LF Woodford Equity Income Fund, has been downgraded from silver to bronze by fund research agency Morningstar.
It comes two months after the £6.48bn fund was moved from the Investment Association (IA)’s UK Equity Income sector to the IA UK All Companies sector as its three-year average yield to the end of December 2017 was 3.5%, compared to the FTSE’s All Share yield of 3.6%.

Peter Brunt, Senior Analyst for Manager Research at Morningstar said: “While Neil Woodford is broadly targeting the same kind of opportunities as those of his Invesco Perpetual days, there is a greater exposure to stocks found at the lower end of the market-cap scale and to unquoted companies.

“The bias to the former has become far more pronounced over the past couple of years, in part as a result of Woodford's more positive view on the UK economy since first-quarter 2017.

“While the group has shown its ability to meet sizable redemptions over the past year, with the fund still standing at over £6bn, such extreme positioning in less-liquid parts of the market make it less nimble than competitors.”

Mr Brunt pointed out a number of Mr Woodford's high-conviction holdings have also experienced stock-specific problems over the past couple of years. In September, Mr Woodford apologised to shareholders as he described a “very painful” period for the fund’s recent performance, with some of its major holdings such as Provident Financial and Astrazeneca hit by difficult periods during 2017.

Phillip Wong, Investment Manager at investment management and stockbroking firm Redmayne Bentley, said: “Questions have been asked as to whether the fund manager has actually deviated away from his investment principles, which has resulted in positioning in less liquid parts of the market. Indeed, there is some concern over the amount of early stage businesses that feature in the fund, and poor stock selection such as Capita PLC has weighed on performance, resulting in redemptions from institutional investors Jupiter and Aviva to name a few.

“However, what appears deep-rooted in Neil Woodford’s investment philosophy is a value bias which has not been in vogue, whereas momentum investing has proven profitable of late. The fund is positioned for a change in sentiment towards value again, but the key question is whether Neil Woodford has damaged his reputation enough to keep investors away.”

Despite the recent setbacks, analysts have pointed out that Woodford’s reputation as one of Britain’s best-performing fund managers has been built over a 30-year career, and suggested the fund could still be worthy of consideration by investors hoping to look beyond recent turbulence and seek longer-term returns.

Phillip added: “There is evidence to suggest that, once invested in the stock market, a buy and hold strategy over the long term will lead to a positive outcome. Indeed, Warren Buffett is a case in point, having delivered envious returns to shareholders through Berkshire Hathaway. He has managed to do this through sticking with his strategy over a long-time horizon and remaining resolute in economic conditions such as recession, whereas others might have shifted their positions and traded the market. Buffett’s investment style naturally leans towards quality stocks that are profitable and generate high returns on capital.

“Closer to home, Terry Smith, who runs the Fundsmith Equity Fund and Nick Train who runs the Finsbury Income & Growth Fund have gained huge fan followings and both adopt a similar approach whereby turnover of the portfolio is low, which has led to consistent outperformance versus their benchmark peers.”

Please remember, investments and income arising from them can fall in value and you may lose some or all of the amount you have invested. Past performance and forecasts are not reliable indicators of future results or performance.

Our view does not constitute a recommendation to invest in any of the investments mentioned.
 
 
 
A game of skill or luck?
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