Over-reliance on Woodford threatens UK portfolios

Despite his poor relative performance in rising markets, investors' appetite for the FE Alpha Manager's funds is still strong.

By Thomas McMahon, Reporter, FE Trustnet
Monday September 24, 2012

UK investors’ over-reliance on Neil Woodford could expose them to a higher-than-expected degree of risk should markets change direction, according to the latest FE Trustnet research.

Woodford’s funds have a strong bias towards defensive, dividend-paying stocks, which could be left behind if sentiment towards risk assets becomes more positive.

Furthermore, some commentators, such as FE Alpha Manager Steve Russell of the Ruffer Investment Company, believe there is a bubble forming in the stocks Woodford prefers, meaning investors could be exposing themselves to the risk of a sudden fall in the value of those assets.

Three-quarters of investors hold at least one Neil Woodford fund, according to last week’s poll of FE Trustnet readers.

However, our data shows that Woodford’s flagship income funds were bottom-quartile performers in 2009 and 2010, when markets were rebounding, and are bottom-quartile performers in the year-to-date.

Performance and sector rank of funds

Name	2012 returns (%)	Rank	2011 returns (%)	Rank	2010 returns (%)	Rank	2009 returns (%)	Rank	2008 returns (%)	Rank
Invesco Perp - High Income	8.15	82/100	8.99	1/94	10.94	72/92	9.81	80/81	-19.42	4/80
Invesco Perp - Income	7.97	86/100	8.59	2/94	10.29	76/92	10.55	79/81	-19.94	7/80

Source: FE Analytics

Invesco Perpetual Income and Invesco Perpetual High Income were both top-quartile performers in 2011, however, when markets performed poorly.

Woodford’s strong bias towards defensive, income-paying stocks helps to explain this pattern and means his portfolios are likely to lag if markets pick up.

With renewed optimism around world markets thanks to policy actions in the US and the eurozone, our research questions whether investors' portfolios are too pessimistically focused.

Furthermore, a number of managers have told FE Trustnet in recent months that they believe the amount of money going into large cap dividend payers is unsustainable.

Our research has highlighted the huge amounts of money that funds in the IMA UK Equity Income sector are putting into a few key stocks.

Of the six stocks we drew attention to, Woodford holds four in the top-10 of both his Income and High Income funds.

Thomas Moore, manager of the Standard Life UK Equity Income trust, told FE Trustnet in a recent interview that he believed large cap defensive stocks had a poor outlook from a dividend point of view, causing him to move his portfolio down the market cap spectrum to protect his yield.

Data from FE Analytics shows that Woodford’s funds are unexceptional in the income stakes, providing investors with a below-average yield for the sector.

Invesco Perpetual Income’s payout of 3.79 per cent and Invesco Perpetual High Income’s 3.66 per cent are both bottom-quartile figures for the IMA UK Equity Income sector.

Despite this, they are the two biggest funds in the sector, with combined assets under management of £21.3bn, according to data from FE Trustnet.

Richard Troue, investment analyst at Hargreaves Lansdowne, said the size of the portfolios is understandable: "Whereas there are plenty of managers out there who have good performance records, there are very few with a record as consistent as Neil Woodford’s."

Performance of income funds and sector since 1995

ALT_TAG

Source: FE Analytics

Data from FE Analytics backs up Troue’s claim: a composite measure of the two income funds shows they have more than doubled the performance of their sector since 1995, the limit of our records.

According to research from the IMA, Invesco Perpetual is the largest UK fund operator by assets under management, with £37.8bn of investors’ money.

FE Trustnet data shows that when the two funds Woodford runs with FE Alpha Manager Paul Causer and Paul Read are included – Invesco Perpetual Distribution and Invesco Perpetual Monthly Income Plus – Woodford is responsible for £26.4bn of this cash, or 70 per cent.

Troue said: "From a star manager, face of Invesco Perpetual point of view, Neil Woodford is their key man and there’s a certain degree of risk associated with having someone so big having so much money."

"However, although he’s the face of the team there are others who work with him and have worked for him for many years – Mark Barnett comes to mind. It’s a team at the end of the day."

"Investors are right to back this manager, but at the same time they shouldn’t put all their portfolios with him."

Tweet this article
Print
Email

Add your comment

Step 1: Tell us what you think...

Step 2: Prove you're not a robot...

	You don't have to do this every time you submit a comment. Login or register free and you won't see it again.
Enter the words above:


Step 3: Submit your comment...

GODFREY FERGUSSON Sep 26th, 2012 at 10:58 AM

As Damion Runyon said 'It ain't always the favourite that wins the race but that's the way to bet.'

Tadpole

valiant Sep 25th, 2012 at 02:58 PM

Chico,
Just to round off my comments. Look at Japan. You say the cycle will unwind eventually. Not so in Japan where debt and deflation persist twenty years in to this bear market. Every year the fund experts tell us Japan is going to recover but it never does. If you can tell me Japan is different to the West I would really be interested in what way.

Ark Welder Sep 25th, 2012 at 04:15 PM

http://www.federalreserve.gov/pubs/ifdp/2002/729/ifdp729.pdf

Ark Welder Sep 25th, 2012 at 04:03 PM

http://www.nber.org/digest/jun05/w10938.html

http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

Chico Sep 25th, 2012 at 02:36 PM

Valiant, you are correct for the current period of deleverage and risk-averse behaviour. The velocity of monetary circulation has fallen, as firms and households hoard cash or reduce debt. But this will eventually unwind. There is no reason why the economic cycle should not resume again, eventually. The Euro concern can't last for ever.
But timing is tricky. I've already lost out, selling my "linkers" before QE2. But my amateur advice is to be very quick to sell bonds once growth returns to trend, whenever that will be!

valiant Sep 25th, 2012 at 02:19 PM

Chico,
I have to be brief so excuse if my answer appears to simple. For inflation to take hold people would firstly have to borrow more from the banks. Secondly Governments would have to print money and give it for free to the public. It's hard to see how people can keep on borrowing indefinitely and people receiving free money might well use it to pay down debt.
In effect I am saying even with an expansion of the money supply it will mean little additional spending and therefore no upward move in prices.

Chico Sep 25th, 2012 at 02:04 PM

Demand-side inflation seems unlikely while growth is below trend and unemployment persists. But money supply growth has been positive and slowly accelerating here and in the USA, starting in 2011.
History tells us that monetary growth without an increase in physical output will give us inflation in the long-term.

valiant Sep 25th, 2012 at 01:32 PM

Chico,
Why ever do you think we will get inflation. Tell us the what will cause it. QE has been going on for a long time, where is the inflation? Is it in Japan? Have we got inflation in the UK? The Governments in the West are trying to cause inflation but it is just not happening.

Chico Sep 25th, 2012 at 01:11 PM

Defensive stocks such as fags, pharma and utilities would appear to be low risk in a long-term, possibly inflationary outlook. In the meantime we all get paid via the dividends.

The real dangers are in the Gilts market. Once inflation from the QE accelerates, interest rates will have to rise and bonds will fall in value. Now is the time to take profits.

Nick Moth Sep 24th, 2012 at 08:36 PM

Thanks for your kind reply Valiant - all the evidence is that policymakers will move heaven and earth to prevent deflation and that would be my bet.

valiant Sep 24th, 2012 at 05:23 PM

Nick Moth,
You make some good points and running through your comments is the theme that no investor can be sure of what will happen to markets in the future. Nevertheless people have to try and make a judgement on what is likely to happen.
I have made two calls. Firstly that the world economy is going to get much worse. Secondly that we are heading for deflation. My belief is that equities, commodities and property will suffer declines over the next few years. How quickly that happens remains unclear.
If this proves to be the case then cash and gilts seem to me the best options. Very few people alive today will have seen severe economic declines. The boom we have just gone through is bigger than any previous one and in my opinion the bust will be equally as big.
There are large numbers of investors who have the belief that bankers and politicians can pull levers and solve our problems. I don't think they can.

Nick Moth Sep 24th, 2012 at 04:47 PM

If you want general exposure to sterling- and dollar-denominated fags and pharma stocks without having to buy the stocks yourself then Woodford is likely to be as good as anyone, isn't he. Will these 'defensive' stocks do well over the short, mid or long term? Who knows? Is there more income to expect from such sources as banks, oil, telecoms and mid-caps? Who knows? Woodford's staples form a significant portion of the UK stock market so - surprise surprise - a lot of money is invested in them. Could people do better? Probably. Worse? Probably. No one knows. At least he isn't JUST tracking the index while pretending otherwise. Talk about unbalancing markets, portfolios or the orbit of the earth is just copy for tired journos, and self-serving promo for other less popular managers. Super-loose inflation-boosting monetary policy suggests borrowing as much as you can and buying ANY kind of London real estate is going to be better and safer than most other forms of investment for a UK resident. Woodford perhaps - the pleasantish suburb in east London - is worth a look.