Markets are the riskiest they have been in five years, according to FE Alpha Manager Neil Woodford (pictured), who warns that investors should be cautious on both the UK and global economy.
Volatility in the S&P 500, which acts to some extent as a bellwether for global markets, rose to its highest level for several years in 2015 after investors reeled with panic about the state of the Chinese economy on last August’s ‘Black Monday’.
Performance of index over five years
Source: FE Analytics
The ‘star’ manager of the £8.3bn CF Woodford Equity Income fund and £808m Woodford Patient Capital Trust has for some time said he thinks the macro background for investing in global stocks is poor due to calamity in the Chinese stock market, slowing global growth and other headwinds.
However, in particular he thinks financial markets are increasingly at risk of “policy errors” in 2016, from the outmoded strategies of the world’s major central banks particularly in the US and UK.
He said: “There is more risk in markets now than at any stage in the last five years and it is as important as ever that investors are selective. I remain cautious about the medium-term outlook for the UK economy, as I do for the global economic environment.”
He thinks central bankers are too set on their long terms concern - or lack of concern - for inflation and unable to shift their analysis as circumstances change.
“All of them [central bankers]… tend to rely on back-dated economic models to some degree, in formulating their views. Herein lies one of the major failings of modern monetary policy and indeed, the ‘dismal science’ of economics more broadly.”
He adds new variables have started to effect the behaviour of markets, while central bankers continue to look backwards.
“In the worlds of economics and monetary policy too, trends change. Things are rarely set in stone. It is necessary, therefore, to recalibrate the models sometimes – or, even better, ditch them altogether – in order to deliver an appropriate policy for an ever-changing world.”
“Yet, central bankers across the developed economies, still seem to look at the post-financial-crisis world through an old world lens, reluctant to admit that the new world is very different.”
“In essence, I am much more concerned about the threat of deflation than inflation.”
However, the UK’s rate setting body within the Bank of England, the Monetary Policy Committee [MPC], is too dominated by those worried about the onset of inflation, Woodford warned.
“In my view, it is more likely that we will see further negative inflation in the UK within the next two years, than a +2 per cent rate.”
Jim Wood-Smith, head of research at Hawksmoor, also thinks the actions of central banks could knock the market of course this year, especially after the Federal Reserve’s pre-Christmas rate rise.
“We all need to settle in for what is likely to be a bumpy time. The Fed’s Christmas present of higher interest rates will create even more uncertainty: for each positive data item, the markets will expect more rises. For each bad one, the spin will be that rate rises have slowed the economy,” he said.
Woodford’s bearishness means he will continue on an investment strategy focusing on stocks that he thinks can grow “sustainably” in the coming years in spite of global economic headwinds.
Also the manager says he will continue to look for smaller positions in earlier-stage companies which he thinks will be unaffected macroeconomic factors.
“This leaves me confident that the funds can deliver attractively positive long-term returns to investors, even in the difficult macroeconomic environment that I foresee and even if we do see policy errors,” Woodford said.
The CF Woodford Equity Income fund is just 18 months old and has seen the best returns in its 80-strong IA UK Equity Income sector since launch, something the manager has achieved fairly consistently along the way.
According to FE Analytics, the fund has returned 21.52 per cent since launch, beating its sector and benchmark by a wide margin while delivering lower volatility.
Performance of fund, sector and index since launch
Source: FE Analytics
Over the longer term the manager also has one of the best track records in his space, having clocked up a performance eclipsing his peer group which is shown below over the past 15 years.
Performance of Woodford versus peer group composite over 15yrs
Source: FE Analytics
Ben Willis, head of research at Whitechurch Securities, says he thinks the manager is a ‘safe pair of hands’.
“Woodford’s long-term success means that you know what you get. His approach does not change and he has continued to take a contrarian, top-down stance, often making large sector bets – no mining, oils and banks, for example,” he told FE Trustnet recently.
“What sets this apart from the competition is Woodford’s ability to unearth and invest into unquoted businesses. This has been a key driver of performance since launch and will remain so over the long term.”
The fund has a clean ongoing charges figure (OCF) of 0.75 per cent.
