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.
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
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
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
Source: FE Analytics
Invesco Perpetual Income
||2012 returns (%)
||2011 returns (%)
||2010 returns (%)
||2009 returns (%)
||2008 returns (%)
|Invesco Perp - High Income
|Invesco Perp - 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
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.
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."