Having to manage billions of pounds worth of inflows over the next year puts Neil Woodford at a significant disadvantage to his peers, according to Rathbones’ head of multi-asset David Coombs, who says he won’t be buying the manager’s new UK Equity Income fund for the time being. CF Woodford Equity Income opened its doors to the public earlier this week, and early estimates suggest it could attract as much as £5bn in its first month.
Coombs (pictured), who runs a number of funds at Rathbones including the £58.4m Total Return Portfolio, believes that the hype surrounding Woodford’s new venture has clouded many investors’ judgements.
He thinks that the manager should be viewed like any other manager, and because of that his rivals have a better chance to outperform in the coming months.
“The degree of flow that we expect to go into the fund hits all of our warning signals,” said Coombs.
“It will make it much harder for him to outperform over the next 12 months. We want the business to settle down before we invest. It’s very much wait-and-see for us at the moment.”
Performance of fund, sector and index Feb 1988 – March 2014
Source: FE Analytics
“You’ve got to take the manager out of the equation, and look at the facts. He is going to have a huge amount of money to manager, and it’s coming in very quickly. If it was anyone else we wouldn’t hold the fund, so we won’t be.”
Woodford has experience of running big funds, and running them very well. When he left Invesco Perpetual his Income and High Income funds held more than £20bn in assets. However, Coombs says the manager hasn’t had to contend with the speed of inflows he is expected to receive in the coming months.
Coombs adds that his lack of access to Woodford at Invesco Perpetual in the past makes him nervous, as he suspects the star manager will not be as receptive to interviews once he is settled in his role.
“We’re waiting for the business to settle down, and when that happens we’ll see what our relationship is like with him,” he said.
However, Woodford Investment Management insists that the star manager will be much more approachable and visible than he was at his previous firm. Rathbones has a meeting with the manager scheduled in the coming weeks.
Coombs’ biggest UK Equity Income weighting across his range of portfolios is FE Alpha Manager Francis Brooke’s Trojan Income fund. Like Woodford, Brooke has a proven track record of long-term outperformance with below average volatility.
Between the launch of Trojan Income in September 2004 and Woodford’s departure in March of this year, Woodford has the edge over his rival from a total return point of view. Brooke has operated with less volatility though.
Performance of funds and index Sept 2004 – March 2014
Source: FE Analytics
Woodford has come under severe criticism at certain points of his career, but time and time again he has proved his doubters wrong.
In the two years between 1 January 2009 and 1 January 2011, Invesco High Income was 21.82 up per cent – almost half as much as the FTSE All Share. However, in the following 12 months he topped the sector, making 8.99 per cent compared to a loss from the index.
Similarly during the dot com bubble Woodford came under mounting pressure, with some claiming he came close to losing his job. Invesco High Income was well short of the All Share in late 1999 for example, but more than made up for this with stellar performance throughout the early 2000s.
Performance of fund, sector and index Jan 1999 – Jan 2005
Source: FE Analytics
The manager prides himself on being a genuine long-term investor, backing stocks and sectors on a 10, 15 and even 20 year view. His decision to avoid tech at the height of the dot com boom, buy into the battered tobacco sector in the early 2000s and avoid banks in the lead up to the 2008 financial crisis have been among his biggest – and most successful calls.
Performance of fund and indices over 20yrs
Source: FE Analytics
Coombs thinks that Woodford deserves huge credit for his big macro and stock calls and consequent outperformance, but thinks that other managers of similar quality have failed to garner the same kind of reputation.
He points to the likes of Aberdeen’s Bruce Stout, who’s Murray International IT has outperformed its composite benchmark – split 60/40 between the FTSE World ex UK and FTSE World UK indices – in 11 of the last 12 calendar years.
Opinion over Woodford’s new venture has been polarised among industry professionals, with some such as Coombs hesitant, others highly sceptical such as Psigma’s Tom Becket, and others extremely optimistic including Whitechurch’s Ben Willis.
Advisory stockbroker Killik & Co is another that falls into the last category. A spokesperson for the group says the firm has made CF Woodford Equity Income available for its clients, pointing to Woodford’s experience and consistency as a key reason for its support.
“Woodford (pictured) has steered his portfolios competently through a number of very different market conditions over the last 25 years or so,” the firm said.
“If we take the 23 year period that he managed the Invesco Income fund and divide it into lots of three year time frames we get 249 separate investment periods.” “The Invesco fund produced a positive return in 226 of these observations – i.e. 91 per cent of the time – and the worst possible three year outcome was [losses of] 4.9 per cent.”
“We expect this manager to continue producing market beating returns over the medium to long term.”
“One potential advantage the new fund may have over the previous fund is the scope to cherry-pick new investments and a lack of any legacy issues, although it may be some time before the magnitude of this potential advantage becomes apparent,” Killik added.