Gleeson (pictured), head of FE Research, has chosen to add contributions to the £3.7bn fund not only because he rates Woodford highly as a stockpicker, but also because he expects his style to win out next year.
“I’ve taken the decision to soften my UK equity exposure and Woodford is the perfect fit for that,” said Gleeson, who’s never held the manager until now.
“My UK equity exposure is very aggressive – I hold Nigel Thomas’ AXA Framlington UK Select Opps fund and Giles Hargreave’s Marlborough UK Micro Cap Growth fund. I’m happy with these funds, but am mindful that my beta is quite high.”
“The risk at the moment is that the Bank of England raises interest rates too soon and tips the UK back into recession. Regardless, I’m anticipating a difficult year for risk assets next year and so tactically I’m investing in someone with a proven ability to protect against the downside.”
A rise in interest rates is seen as one of the biggest threats to equity markets, with JPM’s Bill Eigen saying it could prompt a correction that dwarfs the devastation caused in 1994. Though Gleeson doesn’t go as far as predicting an all-out crash, he thinks 2015 will bring the best out of those who prioritise downside protection.
Though Woodford (pictured below) tends to remain fully invested, Gleeson says the large-cap defensive dividend payers that his fund targets tend to hold up much better than mid-cap cyclicals, for example.
“He lost much less than the market in 2008 and actually made money in 2011,” said Gleeson.
Performance of manager and manager peer group composite over 10yrs
Source: FE Analytics
“He’s made a very good start with his new fund and I think a difficult 2015 will once again complement his style. He’s a proven stockpicker and has very strong ties with the companies he invests in, which is a big help.”
According to FE data, Woodford’s various funds at Invesco Perpetual held up much better than their peers in both 2008 and 2011.
Overall, the manager delivered a positive return of 5.49 per cent in 2011, and in 2008 lost just 19.29 per cent compared to his peer group composite’s 28.69 per cent.
As Gleeson suggests, Woodford’s new fund has started very strongly since its launch in June of this year, topping the 89-strong IMA UK Equity Income sector with returns of just over 7 per cent.
It has also been one of the least volatile funds of its kind over the period.
Performance of funds and index since 19 June 2014
Source: FE Analytics
Mark Barnett’s Invesco Perpetual High Income portfolio, previously headed up by Woodford between 1988 and March of this year, has also strongly outperformed over the period, though to a lesser extent.
Gleeson notes that while Woodford often underperforms his peers and FTSE All Share benchmark when markets strongly rise, he has still very much participated on the upside, posting double-digit returns in 2009, 2010, 2012 and 2013.
“There’s also not too much overlap with the other two funds I own, ensuring that I’m adequately diversified,” Gleeson continued.
“Hargreave specialises in small and micro caps, and while he’s actually proven to operate with a low volatility, [Marlborough UK Micro Cap] is still very much a long-term play. Thomas has more at the higher end of the scale, but has significant exposure to mid-cap cyclicals.”
Thomas and Hargreave (pictured) are among the highest rated stock pickers in the UK, with both AXA Framlington UK Select Opps and Marlborough UK Micro Cap achieving top decile returns in their respective sectors over five and 10-year periods.
Performance of funds and sectors over 10yrs
Source: FE Analytics
Both of the managers have experienced a more turbulent time of late however, first with the sell-off for small and mid-caps in March through to May of this year and then the wider sell-off this autumn proving problematic.
While Gleeson remains an admirer of the managers over the long term and has no plans of selling, he says he is more comfortable holding a manager like Woodford for the time being.
He has also bought more of Robin Geffen’s Neptune Russia & Greater Russia fund, though it has a much smaller weighting in his portfolio.
“I recently doubled my exposure, but that only takes me up to 3 per cent,” he explained.
“This is very much a speculative bet and so I’m not allocating huge amounts. I felt the market was hugely cheap when the sanctions kicked in back in March, but now it’s even cheaper thanks to the oil price falling to $65 or so.”
Performance of fund and indices in 2014
Source: FE Analytics
“Yes, it’s just gone into recession but this often proves a good time to buy. The oil price is unlikely to stay this low for very long, and at $100 a barrel it could come roaring back.”
Neptune Russia & Greater Russia has ongoing charges of 0.97 per cent. It has lost more than its MSCI Russia Large Cap benchmark over one, three and five years, though manager Robin Geffen is considered one of the few genuine active Russian stockpickers in the UK.
