Dampier has immediately bought into the newly launched CF Woodford Equity Income fund from a business and personal point of view, highlighting Woodford (pictured) as one of the best managers in the business.He says he has always found it puzzling why so few professional investors hold the FE Alpha Manager, and thinks it comes down to the fact that they feel compelled to add value by finding a less obvious candidate.
“I’ve read some stuff from [fund of funds] managers saying that those who hold Woodford ‘aren’t going to lose their job’,” he said.
“I understand the point they’re making, but don’t really think it’s a good point to be honest. It implies they’re not holding him because they feel like they should do something different, which isn’t in the best interests of the investor.”
“I think there are some who don’t hold him for the sake of it – it’s like they’re proving a point. It’s a question I’ve asked for many years. I’ve never understood why so few multi-managers hold Woodford and I think it’s for this reason.”
Funds of funds provide investors with a one-stop shop to diversification, but the double layer of fees means that they tend to be more expensive. Dampier thinks that the need to justify the extra expense has led managers to look at more esoteric options, often domiciled offshore, which set them apart from their rivals.
He says that this often does more harm than good, because Woodford is unmatched when it comes to experience and track record.
“It’s odd, because the one thing I’ve found difficult in recent years is to find quality star managers,” he said.
Performance of manager vs peers since Jan 2000
Source: FE Analytics
“On our performance metrics, his track record over 20 years is fantastic – why wouldn’t you hold him?”
Richard Romer-Lee (pictured), managing director of Square Mile, agrees that quality fund managers are wrongly overlooked because they are deemed to be obvious choices.
Square Mile recently launched its Academy of Funds, including 22 elite portfolios given the maximum AAA-rating.
Woodford and other industry stalwarts were included in the list, including FE Alpha Managers Angus Tulloch and Ian Spreadbury.Some commentators see the fact that the list carries few surprises as a negative, but Romer-Lee says this reaction is perplexing.
“We’re talking about generationally outstanding funds. Those that have done the business over many market cycles and that are very clear in their approach, helped by a supportive environment,” he said.
Performance of managers and peers since Jan 2000
Source: FE Analytics
“Yes Woodford has recently moved on, but if you look at Angus Tulloch, Ian Spreadbury and the two Pauls at Invesco Perpetual, they’ve been at their firms for many, many years.”
“There’s a tension between generating the best returns you can and differentiating yourself. People say there are no surprises in the list of 22 – there shouldn’t be any surprises.”
“If you look at these guys, they’re not doing it for the money anymore. They do it because they enjoy it and they feel like they can make a difference.”
Romer-Lee points out that fund of funds managers tend to be in competition with one another and often need to find a manager off the beaten track to help them add value.
One fund of funds manager who is a proponent of investing in smaller funds from niche fund houses is Rathbones’ David Coombs (pictured), who holds the likes of Kiltearn Global Equity, Browns Advisory America and Heronbridge UK Equity in the top-10 of his Rathbone Multi Asset Strategic Growth Portfolio.The FE Alpha Manager rejects the claims of Dampier and Romer-Lee, insisting that he tends to favour smaller funds because they have a better chance of outperforming.
“It’s not all about the managers – it’s also about the businesses that they are operating in, what capacity their funds have and how big they are, what asset classes they are operating in and so on,” he explained.
“The smaller funds that have fewer clients to service and that have less heavy flows are at an advantage. This isn’t always the case of course, but it’s about giving yourself the best chance of outperforming.”
“I’m not investing in them because they are different. That’s rubbish. They just have a better chance of outperforming now.”
“Just look at investment trusts, which keep capacity at a more constant level. If you look at the facts, they outperform funds, and in part it’s for that reason.”
Coombs says that looking at funds off the beaten track – that is to say not in IMA sectors – also gives investors access to specialist portfolios.
“There aren’t 22 great fund managers out there – there are hundreds and possibly thousands, doing very different things,” he added.
One of Coombs’ most successful holdings of recent years is Gervais Williams’ CF Miton Multi Cap Income fund, which is still a top-10 position in his Strategic Growth portfolio.
FE data shows that it is the best performing fund in the IMA UK Equity Income sector since its launch in November 2011, with returns of almost 80 per cent.
Performance of fund, sector and index since launch
Source: FE Analytics
The fund’s small size has allowed it to add a huge amount of value from small and mid caps.
Coombs’ funds are strong performers in their own right, although Rathbones prefers to compare them with their defined risk and return objectives rather than peer groups.
His Total Return fund, for example, targets cash plus 2 per cent with a third of the volatility of global equities, which it has achieved with ease since its launch in June 2009.
Performance of fund and indices since launch
Source: FE Analytics
Coombs adds that he holds a number of very large funds from high profile fund houses across his range, including the likes of Legg Mason Clearbridge US Aggressive, Artemis Global Income and Ignis Absolute Return Government Bond.
“We hold a Pimco bond fund – you don’t get much bigger than that,” he said. “I’m not a big brand snob – I just think that I can generate better returns elsewhere.”
Coombs points out that he is only avoiding Woodford in the short-term because of concerns over his business model, rather than because he feels compelled to look elsewhere.
“Woodford Investment Management is a new start-up. Usually start-ups are small and steady and don’t try to market themselves too much, but this has been the complete opposite,” he said.
“We usually like start-ups because there’s more of a focus on performance and building up a track record, but Woodford is a brand in himself.”
“He’s taking a lot of money, which is not helpful for performance. No one knows how much time he is spending running the business rather than the money, and we don’t know how many more funds are going to be launched.”
“Woodford said that the fund is 'taking shape', which is not what I really want to be hearing. I will wait until the business settles down and make a decision then. At the moment, there are just too many headwinds.”
Coombs spoke in more detail about his reasons for avoiding Woodford in an FE Trustnet article last month.
