Whatever Neil Woodford’s record, there’s no guarantee his new fund will perform

I can’t take much more of Neil Woodford. He’s been promoting his new fund – the Woodford Equity Income Fund – absolutely relentlessly over the last few weeks. That has meant lots of press releases offering his comments on all things pharma related.

But it has also meant a torrent of press releases from every wealth management firm and stock broker he has stopped in to see on his road show around the UK.

There are currently 30 Woodford-themed emails in my inbox and that’s not for want of deletions. So here’s what I know.

I know that Hargreaves Lansdown has secured the lowest fee on the new fund for Vantage investors on their platform (0.6% vs 0.65/75% elsewhere) – something that goes a small way to offsetting the 0.45% platform fee they put on top.

I know that he thinks the pound is overvalued. I know that he’d soon like to launch a fund that invests only in unquoted companies. I know that he is keen to make sure that he keeps costs for investors low and that the management fee he quotes includes more costs than most others do.

I know that he isn’t convinced by the strength of the UK recovery and thinks rates will be lower for even longer; that he thinks the next five years will be “challenging”; that tobacco and pharma will be key themes in his new fund, but that he will be taking high conviction holdings in smaller firms as well as large cap sectors – just as he did at Invesco; that he hates most banks, but he likes HSBC; that he is targeting an income yield for the fund of around 4%; that he thinks he can get “high single digit” returns from the fund regardless of the environment; and that he believes that his “passion and energy have never been stronger” (or so he told Whitehouse Securities anyway).

I also know that he has really got the hang of this PR stuff (check out his video). But here’s what I don’t know – how his fund will perform over the next five, ten, 15 or even 20 years. Much of the PR would have you think that outperformance is a given. But it isn’t.

Defenders will say that Woodford has proved himself over and over again – avoiding the tech bubble and the banking meltdown and picking up on undervalued sectors time after time.

Nonetheless, as Fundexpert.co.uk point out, while over the last ten years Woodford’s Invesco Perpetual Income Fund (which he intends to more or less replicate so as to give investors “continuity”) has been a top performer, over the last five years it is placed only 33rd.

Widen the comparision to include growth funds (which seems reasonable given the amount of the fund taken up by smaller companies) and over 10 years, the fund comes in 17th. Over five years, it comes in 123rd.

As Fundexpert says, “ouch”. All good managers have periods of underperformance and bad luck (look no further than Anthony Bolton in China) and Woodford may soon be back on form.

But before you pile in on the back of this tsunami of publicity, it is worth remembering that you can’t buy past performance – only the hope of future performance.

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11 Responses

  1. 28/05/2014, Pinkers Post wrote

    A BRILLIANT and much overdue contribution to the subject of ‘Rockstars’! Thank you for putting the record straight – literally! On 22 Oct 2013, when Mr Woodford’s decision to leave Invesco was announced, Pinkers Post wrote on the subject: http://pinkerspost.com/post.php (pls scroll down)

    Remember that great tune “Should I Stay or Should I Go” by the English punk rock band The Clash from their album ‘Combat Rock’? Yes… released more than 30 years ago the lyrics seem somewhat past sell-by date… but hey… think, again! Readers of the business pages would acknowledge the topical nature of this great song.

    In the last couple of years, the rockstars of the business world, usually referred to as ‘star managers’, have not exactly proved to be the most loyal of tribes, leaving their employers in droves… and with it causing earthquakes measuring pretty high scores on the Richter scale.

    First it was Anthony Bolton of Fidelity closely followed by Richard Buxton of Schroders and now the star of the middle classes who haven’t got a clue about investing: Neil Woodford of Invesco.

    All three have produced stellar returns for their investors and with it handsome fees for their employers. So should investors be concerned? Well, judging by the massive outflow of funds following their exit, they clearly are. But, as ever, the proof is in the pudding and, again; Pinkers has to refer to the brilliant Merryn Somerset Webb: “Extrapolate away, but nothing lasts for ever.” Anthony Bolton’s foray into China proved a disaster and many other high-profile managers haven’t fared much better but got away with less media attention. The issue is that the rockstars play in bands but going solo is playing quite different a tune… and, of course, post Lehmans the world simply isn’t as safe as it used to be. So, in conclusion: Pinkers wishes Mr Woodford all success… but investors beware… buying into IPO’s is usually a risky play.

  2. 28/05/2014, CKP wrote

    Most of these so-called “star” fund managers who have outperformed the market long term generally got lucky early on in their career and then managed to hang on to these early gains while compounding them at around the average rate. Thanks to the early outperformance their annualised growth rate is flattered. What is not generally published is the year on year growth rate of their fund vs the index because in the majority of years they will only be average or underperform. Funds that do badly in the early years of their life often get quietly closed down as the initial underperformance will drag down annualised growth figures for years to come.

  3. 30/05/2014, Longtermyieldman wrote

    Potential investors in Woodford’s new fund should consider some risk factors not identified in the marketing collateral released to date. These relate to the Authorised Corporate Director (ACD) of the fund, which is responsible for pretty much everything other than the stock selection decisions, Capita Financial Managers Limited (CFML).

    1. CFML stands accused of losing more of £200m of investors’ money in two of the funds it has managed, Arch Cru and The Connaught Income Fund Series 1. Investors allege widespread negligence as well as the concealment of material concerns from customers

    2. As a result, CFML faces litigation from investors of both funds and calls for the Financial Conduct Authority to issue a restitution order against it in respect of the former. These claims significantly exceed the firm’s net worth and insurance cover. While the parent, Capita plc, is good for the money, it has already publicly stated that it will not support the subsidiary, so there is a high risk that the ACD will shortly be placed in administration

    3. It is possible that there will also be enforcement action arising from CFML’s conduct in relation to the latter fund (Connaught) or to protect investors in the event of insolvency risk. This could lead to the Woodford fund being moved to another ACD at short notice, which could require its suspension.

    In the light of the above risks, I will not be investing at this time…

  4. 31/05/2014, mr clyde wrote

    CKP is absolutely right – In 1980 my mum inherited a few shares in a spread of UK Blue Chips. She hasn’t touched them, has taken all the dividends as income, lost 25% of her portfolio when GEC went bust, and is still showing a capital gain of well over 2,000%.

  5. 02/06/2014, JT wrote

    Just in the interest of transparency Merryn, are you still on the board of the Edinburgh Investment Trust (which Woodford has now left and from which clients might conceivably transfer their money now Woodford’s new venture is launching)?

    • 05/06/2014, 4caster wrote

      You should check your facts before going into print, JT. It took two days for Merryn to deny your allegation, by which time she probably suffered some damage to her reputation for transparency. Don’t be surprised if she sues you for defamation.

  6. 04/06/2014, Merryn wrote

    @JT I’ve never been on the board of the Edinburgh Investment Trust and can’t imagine I ever will be so I’m not sure where you got that idea from! I am, as you can clearly see on any bio of me, on the board of two smaller company investment trusts (BG Shin Nippon and Montanaro European) but neither have any connection whatsoever to Neil Woodford.

    • 05/06/2014, JT wrote

      My apologies Merryn. I see from a quick search that you’ve promoted the Edinburgh Trust in the past rather than being connected professionally.

      I never invested because it had a performance fee. Any views on the Trust now that there’s a new manager in post and the performance fee has been scrapped?

  7. 04/06/2014, Jimbo757 wrote

    I thought the idea of the RDR was to remove commission and thus the incentive to push certain funds. So why am I getting all these emails & mailshots plugging Woodford’s new fund? What’s in it for them?

  8. 04/06/2014, loads2 wrote

    If held on the HL platform, this fund still openly charges over 1%, notwithstanding all the hidden charges not included in the fund’s AMC namely stamp duty, trading commission, etc etc

    If anyone doesn’t believe that fund managers are STILL lying over what their funds actually cost, put a small sum in a managed fund and the invest the same in an ETF equivalent.

    Im not tipping either – but Black Rock’s gold and gen fund also exists in an investment trust form BRWM and there are ETFs replicating the same. Over time you will see the managed fund version underperform the investment trust and the ETF.

    When the market goes up the managed fund goes up the least.
    When the market goes down the managed fund goes down the most.

    Ive seen it time and time again in every managed fund in every sector.

    Hargreaves Lansdown don’t / wont tell you this

  9. 04/06/2014, DAS1951 wrote

    I should like to agree with Pinkers Post “buying into IPOs is usually a risky play.” (misplaced apostrophe removed…)

    Years ago I read the advice never to invest in a fund at launch. It often drops soon after. Sounds like good advice, still.

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