The last year may not have been Neil Woodford’s best-ever. However, he remains one of the most successful and well-regarded investors in the UK of recent decades. Here’s how you could adopt parts of his investment style to boost your own portfolio returns.
Valuations
At his core, Neil Woodford is a value investor. He may not always seek out stocks which are dirt cheap, but he rarely pays an exceptionally high price for any company given its future prospects. This tactic appears to have served him well, with capital growth likely to come from upward re-ratings to company valuations, as well as from increases in profitability.
Certainly, value investing is a tough strategy to follow. It can mean there are periods of time when an investor misses out on a Bull Run. This is because valuations may be regarded as unsustainably high, with value investors more likely to sell rather than buy. It can also mean underperformance during recessionary periods. While many investors are selling their falling shares, value investors will be buying and this can mean paper losses.
However, in the long run, value investing has proven to be a successful strategy. It may offer short periods of underperformance, but helps to improve an investor’s risk/reward ratio.
Long-term outlook
While many investors focus on the short-term outlook of the companies in which they invest, Neil Woodford looks at the long-term growth potential they offer. He is an exceptionally patient investor and will seek to benefit from business and economic cycles through buying companies which are financially sound, but which may be experiencing short-term difficulties within their end markets.
As with value investing, buying companies which are undervalued for a reason can lead to underperformance in the short run. Such stocks are rarely popular among most investors, and this can translate into disappointing share price performance. But in the long run, trading conditions inevitably change and a high-quality stock can see its financial performance improve dramatically. Alongside a focus on investment themes, considering the long-term outlook can boost portfolio performance.
Conviction
One criticism of some active fund managers is their lack of conviction when making investment decisions. In other words, they attempt to limit risk by not deviating too far from the make-up of the wider index. While this may reduce risk, it can also limit potential returns and lead to an active fund being described as a ‘closet tracker’.
However, Neil Woodford is known for his conviction when investing. He often takes sizeable positions in the companies he backs, and also builds portfolios which are often very different to the wider index. This can lead to greater volatility in returns on a relative basis, but in the long run it can also mean higher returns.
While diversifying a portfolio is also highly important, striking the right balance between diversity and conviction can lead to an improved risk/reward ratio for the long run.