It’s no secret that Neil Woodford’s Equity Income Fund is underperforming right now. As I detailed yesterday, the fund is one of the worst-performing UK equity funds over the last three years, having returned -7% versus a total return of around 33% for the FTSE All-Share index. It’s no wonder that investors are pulling their money out in droves. By contrast, Nick Train, who co-manages the Lindsell Train UK Equity fund, is absolutely smashing it at the moment. This fund is up around 47% over the last three years – 14% higher than the market.
Here, I want to take a look at why one fund manager is performing so poorly and the other is doing so well. Let’s take a closer look at their investment styles.
Neil Woodford
Looking at Woodford’s approach, it’s clear that the portfolio manager favours a ‘value’ approach to investing. In other words, he’s looking for stocks that he thinks are undervalued. Woodford is also very much a ‘contrarian’ manager. So he looks for stocks that are out of favour, and he’s not afraid to go against the herd.
Additionally – and this is a big factor – in recent years Woodford has also gravitated towards smaller, early-stage companies that are high risk, high reward bets. His portfolio is currently full of smaller technology and healthcare companies.
Nick Train
Nick Train, on the other hand, tends to invest in a similar way to Warren Buffett. Train looks for high-quality companies that have strong competitive advantages such as powerful brands and he holds them for the long term. He likes companies that are already highly profitable yet that have long-term growth stories. This is often referred to as ‘quality‘ investing.
What’s interesting about Train is that he’s definitely less concerned about valuation than some other managers. For example, plenty of stocks in his UK equity portfolio, such as Hargreaves Lansdown and Diageo, don’t look cheap by traditional forms of analysis. Yet these stocks have generated fantastic returns in recent years.
Why the difference in performance?
Why is Woodford underperforming while Train is dominating? There are a couple of reasons, in my opinion.
For starters, value investing is out of favour right now. It has been for years. While value investing, in general, is an excellent strategy (a lot of studies have shown that it tends to outperform growth investing over the long term) it’s not a popular strategy at present so this is hurting Woodford. In contrast, quality investing is popular at the moment and plenty of investors are happy to pay higher prices for higher-quality stocks in the current environment, and this is supporting Train’s strategy.
Second, while both managers have had a few duds in their portfolios in recent years (which is to be expected) Woodford has had more flops than Train and this has hurt his performance. For example, stocks such as Provident Financial, Purplebricks, AA, Capita, Prothena, and Kier have all blown up recently. Ultimately, his stock picking has let him down in recent years.
Of course, portfolio management is a tricky business and no portfolio manager outperforms the market forever. Woodford could make a comeback if value investing comes back into style and his bets pay off. However, for now, Train seems to have all the momentum. His quality investing style is generating fantastic returns for investors.