Investing is cyclical – most experienced investors know that, especially those who trade commodities. The higher they rise, the harder they fall – as anybody who bought Bitcoin at its peak knows to their cost. So why is everybody surprised when ace fund manager Neil Woodford finally succumbs to gravity after 30 high-flying years? Did you think his funds would go up, and up, and up forever?
No more hero
That said, Woodford’s fall from grace has been far sharper than I could ever have imagined. His eponymous flagship, LF Woodford Equity Income, enjoyed a rip-roaring first year after launch in June 2014, thrashing the market as the big man had nearly always done before, until things went wrong.
The fund is now down 13.6% measured over three years, while his benchmark UK All Companies index is up 11% over the same period. The last year has been tough for almost everybody, but particularly Woodford, whose fund is down 16.6% against a drop of 11.9% on his benchmark. This is a severe underperformance.
Boom and bust
Worse, he has make a string of horrible investment calls, backing high-profile company failures including Allied Minds, Capita and Provident Financial. His investment trust Patient Capital Trust has compounded the sense of failure, falling 21.9% over three years, against a rise of 9.4% for the average UK investment trust.
Woodford has never been short of confidence in his own abilities, so no doubt he’s sitting on the riverbank waiting for things to change, to use an old Chinese proverb. But his loyal army of investors aren’t as patient. LF Woodford Equity Income now holds less than £5bn, half the £10bn it managed at its zenith, while Patient Capital Trust is a £650m minnow.
Holding on
I invested in Woodford Equity Income shortly after launch, and continue to hold. I’ve had my reservations, though, as I explained last year. My big worry was that while Woodford has suffered periods of underperformance before, that was often through making heroic contrarian calls, such as shunning boom-bust tech and banking stocks. His recent troubles are down to poor stock picking, which is less heroic, I wrote.
Yet now investment trends could be swinging back in his favour. First, his fund is 91% invested in the UK, which has underperformed most global markets, especially the US (which has flattered performance at Terry Smith’s Fundsmith Equity, 65% invested in the States). Brexit continues to cast a shadow, but if that lifts, Woodford might gain some respite.
Turning around
Woodford has previously criticised negative perceptions about the UK economy, and if we get some kind of Brexit solution, his fund could fly again. His focus is on cheap domestic stocks, rather than the big FTSE 100 blue chips that have benefited from sterling weakness. It’s this sector that will benefit most if Brexit is sorted, the pound rises, inflation falls, and wages continue to increase. Woodford has called the market correctly before, only too soon. It came round in time.
So I’m giving him another year. Woodford has what it takes to bounce back. Also, investing is cyclical, and it’s his turn.