Many of our clients have some UK Equity exposure through Neil Woodford’s UK Equity Income Fund. We continually monitor the performance of the funds we recommend and we have been aware for the past few months that Neil’s fund has been slipping in respect of performance in his sector and against his peer group. The fund has also received some very critical comments in the press recently.
We have been supporting Neil Woodford since the late 1990’s when he was managing UK Equities at Invesco Perpetual and we continued to support him when he left Invesco Perpetual in 2014 to establish his own investment management company. His long-term fund performance until quite recently has been outstanding, so it has been both a surprise and a disappointment to see his funds falling to the very bottom of the UK Equity Income sector. To understand what is happening with Neil’s fund, we were invited to meet with Neil last week at his offices just outside Oxford.
First, a few facts; the CF Woodford UK Equity fund was launched on 2 June 2014. It is now valued at £7.72bn, so it’s a pretty large fund. The first three years of the fund saw very good performance against its peers in the sector and an above average dividend, but from mid-2017 a series of stock specific problems began to drag on the performance. Over the past 12 months to 27 February 2018 the fund is showing a -9.2% loss; the UK Equity Income sector achieved +4.6% with dividends re-invested over the same period. This is a serious divergence.
In respect of the specific stock problems that received media attention, the biggest problem was Provident Financial whose share price fell 70% in a day. At the time, Neil was and remains one of the largest shareholders and the shares represented some 3% of his fund and a top 10 holding. Smaller holdings that nevertheless saw significant problems included Capita, which fell 40% and the AA falling 35% – all in a single day’s trading!
The problem with Provident Financial was well-documented – essentially a poor management decision to re-structure the salesforce. Neil admits he didn’t see it coming; however he still believes in the company and actually invested further funds. Today’s announcement by the company has seen an 83% jump in the price of the shares. It is a start on the path to recovery but there is a long way to go before it gets back to where it was. Neil’s view is that the shares were oversold and the business remains strong.
Single investment issues aside, the key thing that emerged from our meeting with Neil is the sector positioning of his fund; this is the real reason for the divergence in performance. Neil has concentrated his stock selections on domestically focused UK companies – he is also highly overweight in smaller healthcare companies (25% of the fund) where he sees bigger opportunities for long-term growth and financials (a whopping 37% of the fund – it’s worth remembering that Neil was out of the banks completely in 2006). His view on the UK is that it is the least-loved market in the World at the moment and many of the domestically focused stocks that he owns are both unloved and consequently, highly undervalued. He is very positive on UK housebuilders (against a general market sentiment that seems to have turned negative on the sector) and has holdings in Barratt, Taylor Wimpey and Crest Nicolson.
This sector focus is costing Neil performance at the moment – the best returns for UK companies over the past 18 months have come from those that are large cap and international in their operation; they have benefitted from the fall in sterling following the Brexit vote.
Neil has more companies in his portfolio than many other fund managers and he is one of the few manager’s that publish everything he holds; this may be something that he changes to take away the media scrutiny on his selections.
I would also add that Neil is a manager who has a large conviction on his views on the economy. He also has track record here; he avoided the dot com bubble that led to a bust in 2000 and as mentioned avoided the banks before the 2008 banking crisis. So my point is that he is not afraid to be away from the pack and won’t tether himself to a formal benchmark.
Whether he is adding to his liquidity problems by having 10% of his fund in unquoted stocks remains to be seen. He points to a 19% investment rate of return from his unquoted share portfolio and emphasises his objective as a long-term investor.
Neil is clearly concerned with the recent performance and we wouldn’t expect otherwise; we are also concerned. In his own words – “if it doesn’t turn around in 12 months then I am toast”. But he has track record on the big calls and his big call at the moment is domestically focused UK companies that are attractively valued. He likes what he is holding and having to sell down assets due to investors pulling money away from him means that he likes what he is holding even more.
We say stay with him for 2018, we will know by the end of the year if his big call is going to pay off.
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