JULY 2019 MARKET UPDATE
The recent furore and headlines over Neil Woodford’s eponymous Woodford Equity Income Fund, where he has been forced to temporarily gate the fund (i.e. investors are currently unable to sell their units and therefore withdraw their money), highlights some important issues to investors.
To those not familiar with Neil Woodford, he built his reputation as a skilled stockpicker by earning returns well in excess of the UK stock market over a 25 year period during his tenure at first Perpetual and later Invesco Perpetual (after that firm was acquired by the large American asset manager Invesco) and eventually just Invesco.
He was lauded in the media as Britain’s best fund manager and his reputation was cemented after he ignored the tech boom during the late 1990’s. The fund subsequently enjoyed stellar performance as the tech boom turned to bust and many others who rode that particular investment wave fell by the wayside.
He left Invesco in 2014 to go from being an employee, albeit no doubt an extremely well rewarded one, to an owner by setting up his own firm Woodford Asset Management. The motivation for this is not hard to find: he would be keeping all of the annual management fees for himself and his other founding shareholders (indeed it is estimated that since inception his firm has reaped over £100m in fees).
Given his excellent track record and reputation, investors followed him with their money in droves, taking his new Woodford Equity Income Fund to a peak value of over £12billion.
However, his performance has been absolutely dire, and investors finally tired of such. Once some large institutional investors withdrew their money (or tried to) the resulting publicity immediately meant an avalanche of redemption requests.
He cannot currently liquidate the fund’s holdings in stock market quoted companies fast enough to pay such investor demands for the return of their money (never mind the unquoted holdings which by their nature are extremely illiquid and the reason why it may take some time to fully repay investors from the fund).
For this reason he has been forced to halt withdrawals for the time being.
So what conclusions can be drawn?
Firstly, it is obvious in hindsight that the capabilities and staff of a large organisation with a large research team including analysts, economists etc that he had around him at Invesco helped him with his investment strategy and stockpicking much more than he, or the media and the City, gave them credit for.
Secondly hubris. His investment style changed and he started to stray away from taking big bets by owning large stakes in very large companies, a strategy where he had enjoyed much success, and instead started incorporating a large percentage of unquoted highly risky biotechnology companies, an area in which he had little experience and, as has now become apparent, very little expertise.
He even launched a separate investment vehicle called Patient Capital to invest in such early stage biotech companies. Forgive the obvious pun, but shareholders in that investment vehicle will have to be extremely patient: the share price stands at 55p compared to the 100p launch price in 2014.
Thirdly, and perhaps ignored by the majority of mainstream media, was the abysmal stock picking he demonstrated in quoted businesses for fund holders. The litany of disasters included some of the worst stock market performers of recent years such as AA, Provident Financial, Kier Group and others too numerous to list here.
These contributed to a degree of underperformance that is quite staggering. As at today, over the past 3 years his fund has actually contrived to lose almost 22%, whereas by contrast the average fund is up by over 27%!
In his sector that ranks him as 246 out of (wait for it) 246. Indeed, once the true value of the unquoted stocks is eventually revealed it could be very much worse than this.
Finally, one point I believe is important above all others: Skin in the game. How much of his own wealth did he invest in his fund? From what we can tell, either very little or none. There is nothing like having your own money on the line to concentrate the mind on an appropriate level of risk.
Full disclosure: we have never owned the affected funds for our clients. They did not pass our selection process for the reasons stated above.