Woodford (pictured) is the UK’s most well-known fund manager and his 26-year track record at Invesco Perpetual has been closely scrutinised by all areas of the fund management industry since he announced he would leave the group to set up his own venture in October last year.
The experts who have backed him at his new venture, most of whom have sold their stake in Invesco Perpetual High Income or Income, talk up his high-conviction and often contrarian approach to investing in the UK stock market. They also point to his stellar track record, highlighting the amount investors would have made if they had bought his High Income fund when it launched in February 1988.
According to FE Analytics, the fund returned 2,407.69 per cent during Woodford’s time as manager. The FTSE All Share returned 989.59 per cent over the same period.
In monetary terms, a £10,000 investment at inception would have made you just over a quarter of a million pounds by March 2014.
Performance of fund vs index between Feb 1988 and Mar 2014
Source: FE Analytics
That’s enough about the past though – what about the future? The backdrop of investing in the UK stock market differs greatly now from the 1980s, diluting the relevance of the manager’s past successes.
The world is a very different place – in February 1988 the Berlin Wall was still standing, Nelson Mandela was still in prison and the internet was just the latest fad.
Financial markets were also in a very different place. The FTSE was at 1,700 in February 1988, while today it is close to its record level at 6,800.
Black Monday struck Wall Street just a few months prior to the fund’s launch in October 1987, causing US and UK equities to plummet. The FTSE 100 fell from 2,400 to 1,500 in just a few weeks.
The graph below charts the performance of the FTSE All Share between 1986 and 1990, showing that Woodford was fortunate enough to launch his fund into a rebounding market.
Performance of index from Jan 1986 to Jan 1990
Source: FE Analytics
“In 1988, no one was interested in investing,” Mark Dampier, head of research at Hargreaves Lansdown, said.
“During my 30-year career, 1988 was by far the worst because the phone just didn’t ring. The stock market crash was such a huge shock following a few years of bullish sentiment, so you could say Neil launched his fund at a great time.”
While investing in a rebounding market helped Woodford from an absolute point of view, Dampier points out that no one did him any favours from a relative point of view.
Several leading experts have warned that the outlook for UK equities following a number of years of strong gains is now less positive. The FTSE All Share has almost doubled over the past five years – a far cry from the environment in 1988.
Performance of sector and index over 5yrs
Source: FE Analytics
Rob Morgan, pensions and investment analyst, says that he wouldn’t be surprised if Woodford were to keep a sizeable cash weighting in his fund for the first few months to mitigate the risk of a correction.
However, if the FE Alpha Manager remains at the helm of CF Woodford Equity Income for another quarter century, a short-term fall is unlikely to do too much harm to his record. Indeed, the manager guided his Invesco funds through some very tough times, most notably the dotcom bubble and the global financial crisis.
Another key point to consider is the volume of assets Woodford is running now compared with 1988.
His Invesco Perpetual fund was launched at £14m 26 years ago, while early estimations suggest that CF Woodford Equity Income could be as large as £5bn by the end of June.
The large majority of fund managers have the opportunity to gain an early track record with a smaller portfolio, which allows them to implement their ideas more freely. It doesn’t seem Woodford will have that luxury.
Morgan says that the size of the fund at this early stage could create a problem for the manager.
“I think it will be a challenge,” Morgan said.
“People keep focusing on the outflows that Mark Barnett may have to deal with as he may have to offload stock, but the same is true the other way round as Woodford will have to keep buying.”
“Because there will be investors buying Woodford’s fund who aren’t shifting out of Invesco Perpetual High Income, there could potentially be more buyers than sellers.”
While there are some experts who fully expect Woodford to replicate his past performance, there are those who say he is already “past it”.
Their go-to stat is that his Invesco Perpetual High Income fund only returned 115 per cent over the last five years that Woodford was in charge, while the FTSE All Share returned more than 140 per cent. This includes significant underperformance in 2009, 2010 and 2012.
Fund size has often been cited as a reason for the underperformance, as has the manager’s unwillingness to back more cyclical stocks exposed to the domestic economy.
Performance of fund vs index from Mar 2009 to Mar 2014
Source: FE Analytics
However, Dampier thinks the criticism directed at Woodford’s five-year figures is laughably short-term.
“I do think that most people don’t really understand how Neil invests,” he said.
“I’ve known him for 20 years now and he was a long-term investor then and he is a long-term investor now. You would be foolish to buy his fund if you weren’t going to hold it for at least 10 years.”
Dampier adds that the period since the financial crisis has been categorised by vast mid and small cap outperformance, a market that doesn’t suit Woodford’s style. Indeed, if you look at Woodford’s last seven years as manager – therefore including the 2008 crash – the results are very different.
Performance of fund vs sector and index from Mar 2007 to Mar 2014
Source: FE Analytics
Protecting against the downside has been one of the main reasons for Woodford’s strong gains – remember, if you lose 50 per cent one year you have to make a full 100 per cent to get back to even.
While the manager has added value by investing in small and mid caps and most recently unquoted companies, it is large caps that have dominated his portfolio since 1988.
With the consensus being that large caps are currently undervalued against their small-to-mid cap counterparts, it could well be a good time to launch a fund that focuses predominantly on the FTSE 100.
For those interested in buying the star manager’s new CF Woodford Equity Income fund, it has a prospective yield of 4 per cent and has an ongoing charges figure of 0.75 per cent.
