My column a few weeks ago on Neil Woodford’s current travails pointed out the circumstances behind his fund’s suspension.
The key in any investment portfolio is to have your portfolio well diversified, but some portfolios I have seen in the past, held large exposure to this one fund, far beyond what made sense diversification-wise.
His two key supporters at his launch with all the razzmatazz and hype have dropped him like a hot potato, but they knew how he was structured, given, for example, Hargreaves Lansdown owned a staggering 38% of the Woodford Equity Income fund. It also owned nearly two thirds of the Woodford Income Focus fund. Both were recently dropped as “Wealth 50” recommendations.
As the suspension lift looms closer, what should an investor be thinking about?
Well let’s start with his skills. He didn’t become a bad investor overnight as we have said. Remember he is the investor famous for ignoring the tech stocks in 2000 as he couldn’t see their value, and also avoided the financial crisis in 2008. That’s no mistake.
He has an eye for value most don’t. Sometimes markets don’t make sense, however. They just don’t do what they are supposed to, or what you think they are supposed to. You might argue that with the current deterioration in Iran / USA relationships, stocks should nosedive.
For sure, they should.
But they don’t.
Maybe the market thinks his spellcheck isn’t working?
I won’t go over Woodford’s style bias and his belief that Brexit won’t be all that bad. He has been very wrong about that and paid the price, but also made some bad stock calls which have been brutal. Kier Group down 40% in a day, and Purple Bricks down 70% in a year, are two of a few calls that have been off the dartboard for Woodford.
When the fund re-opens, do you stay or do you go?
It’s very much your call, based on your view of a very complicated situation that could play out in many ways.
The classic mistake investors make is to buy at a high, when everyone is buying, and sell at a low when everyone else is selling.
Few would argue that UK non-growth domestic assets are undervalued. Woodford believes (and that’s the key judgement now from a manager who made good valuation calls, but not of late) the prospects for the UK economy are better than is believed, and that he has never seen such a big difference in value between stocks. If that is believed, selling now would be at a discount.
Much of the future success of the stocks he holds is really aligned to a soft, organised, or no Brexit. Anything other than that, and the stocks come under further downward pressure. As I have said before, anything that can get cheap, can get cheaper.
An ‘organised’ Brexit would undoubtedly have an upward run on beaten-up prices, seen by many as a 30-year low in valuation terms. Foreign investors who have stayed away, would be accessing these shares at a discount anyhow, but with a weak Sterling, and momentum, they would be attractive to investors who have shunned this market for some time.
It will, however, be a call on a smooth Brexit.
The Brexit conundrum
Passive funds dampen this momentum as they hold for longer, not allowing shares to achieve mean reversion (getting valuations back to where they naturally should be) as quick as they should. But they will.
When? Is the question.
Or, you could argue that you don’t know if you can trust him to stick to his mandate as he moved from buying what you think he should be buying in an income fund – income producing stocks.
It should be noted that this fund is also down from an unmanageable £10bn closer to a more manageable level at c£3.5bn, so allowing a more nimble approach.
Much will depend on how investors react on the re-opening of the fund.
About the author
Peter McGahan is Chief Executive of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
Have a query on investments, please call 01872 222422 or visit WWFP.net.Last modified: June 10, 2021