Lessons of the Woodford mess (Birminham Post article 27.06.2019)

When investment managers reach near cult status it is time to be wary.

Neil Woodford has been taking a kicking in the wake of a mass exit from his flagship Equity Income fund, tumbling from £10.2 billion under management to just £3.7 billion ahead of its suspension.

Yet it is not long ago that the pundits were glorifying the man who had enjoyed a long-term record of market-beating returns.

His fall is spectacular.

In June 2015 a BBC article, describing Woodford as “the man who can’t stop making money”, declared: “Since he launched his own fund exactly a year ago, Neil Woodford has delighted investors with an 18 per cent return on their cash.”

And, highlighting his stellar performance at previous employer, Invesco Perpetual, it went on: “Anyone investing a pension fund of £10,000 with him 27 years ago – and then following him to his new fund – would now have £309,000. Had they invested the money across the stock market as a whole, they would only have £117,000.”

In contrast, on June 4 this year, the BBC asked: “What went wrong for Woodford?”

Citing figures from FE Analytics showing the fund had made a total return of a mere 0.36 per cent since its launch, this article quoted Patrick Connolly, from financial advisers Chase de Vere, as stating that the affair demonstrated how investors needed to be “sceptical of the hype and to diversify their investments”, adding: “Woodford was promoted as some kind of superstar and that is clearly not the case.”

Something of a maverick, Woodford built up his track record when dodging the dotcom bubble bursting in 2000 and then having minimal exposure to bank shares as the financial crisis broke in 2007.

Typically he combined the buying and holding of big “defensive” stocks in sectors like pharmaceuticals and tobacco with more unconventional investments, backing a string of unquoted businesses in the early stage of development.

However, in the last two years he has found himself being hammered by a perfect storm from across the spectrum.

Big players such as Glaxosmithkline, Imperial Tobacco, BAT, Rolls-Royce and Capita have struggled. He was on the wrong side of the Provident Financial debacle, while the likes of Kier and Purplebricks have also performed poorly. Some non-blue chip stocks have proved losers too including a 29 per cent stake in energy broker Utilitywise, which collapsed into administration in February.

To be fair to Woodford, his overall philosophy appears sound – like Warren Buffett, he believes in long-term investment. Typically, he only buys when shares appear a bargain and holds his purchases for years.

And, back in 2015, he cautioned: “It’s far too early to conclude that the fund’s strategy has worked.”

Can he save himself?

He believes he can. “Many companies that generate most of their revenues from the UK are as cheap as I can ever remember. In some cases the gap between value and price is as wide as I have ever seen in more than 30 years.”

However, multi-manager or fund of funds investing can prove a better bet.

Multi-manager funds offer exactly that – access to several (often between 15 and 30) fund managers within one fund. If one fund manager gets things very wrong then it shouldn’t be the end of the world for the investor as it has so many other managers and strategies in there. These funds offer genuine diversification; ongoing monitoring; use passive and active strategies; growth and value styles; plus multi assets, such as bonds, cash, property, commodities and not just equities.

To put it simply … a few heads are surely better than one.