While his £13bn Invesco Perpetual High Income fund can no longer be considered the biggest fund in the IMA universe, it is second only to the team-managed Standard Life GARS Absolute Return fund, a very different proposition. Taken together with its similar companion fund, Invesco Perpetual Income, Woodford (pictured) runs £21bn of investors’ money, and that’s before counting the mixed asset funds he shares leadership of.
Woodford remains the manager most trusted by UK investors, which is usually attributed to his highly successful long-term track record.
Invesco Perpetual High Income and Income are the two best-performing funds in the IMA UK Equity Income sector over the past 10 years, while Woodford’s track record of success dates back much further, as examined in a previous article.
However, the numbers do not tell the full story. Chris Spear, managing director of Spear Financial Services, says that many relatively new investors will not appreciate that Woodford’s reputation is built on getting the two biggest calls of the past two decades correct – and that he took a lot of flak for them at the time.
"If you go back into the history of Invesco and Perpetual, it was around the time of the tech bubble and Invesco were heavily into tech, and when Neil Woodford was with Perpetual they were shouting that the bubble was going to burst," he said.
"That is where his popularity comes from, because Perpetual were saying avoid the tech bubble. Everyone was laughing at him and then it imploded."
Data from FE Analytics shows that the two Invesco Perpetual income funds prospered in 2001 when the FTSE All Share crashed following the bursting of the dotcom bubble.
Performance of funds vs index 1998 to 2003
Source: FE Analytics
"Then everyone looked at Neil Woodford as someone who was able to think outside the box, ignore the noise and use his convictions," Spear said.
"Even some of the Invesco funds at the time, the Invesco Growth fund for example, were massively into tech companies; they were buying small German tech firms."
"So Woodford took the reputation of Perpetual into Invesco. And then with the credit crunch he was telling everyone to avoid banks and he was right again."
Woodford’s two biggest funds performed relatively well in the 2008 crash, protecting investors' capital better than the index and average fund in the sector.
Performance of funds vs index 2007 to 2009
Source: FE Analytics
"The rumour is that Invesco were beginning to question whether they had made the right call in hiring him before the credit crunch, because he was underperforming at the time, but then he comes through," Spear said.
"Investment is a long-term thing. There’s a lot of noise about short-term performance, but with Woodford you have a manager that people have invested in over the very long-term and have done well with."
"In some ways he is a little bit old fashioned in that he takes a long-term view."
One of the issues always raised with Woodford’s flagship funds is their size. Because they are so big, for them to take a meaningful position in any company – one that would affect performance significantly – they would need to become a significant shareholder.
Selling out of a company can also become a problem for big funds, as by putting a large amount of shares on the market at the same time they could push the share price down, erasing some of the gains they have made on the stock.
Larger funds have less flexibility of movement, but Spear says that this can be an advantage in that it ensures that the manager only buys companies he is happy to hold for the long-term.
"Most investors take shorter-term views, perhaps just a six-month view. But Woodford is long-term – the size of the fund is so big that he has to make long-term calls, which means he will get it wrong in the short-term but he comes through in the long-term," he said.
The danger of judging the manager over the short-term is apparent when looking at performance over the past year.
Woodford’s funds sat in the bottom quartile of the sector in 2012, but the strong performance of some of his stocks, including healthcare favourites AstraZeneca and GlaxoSmithKline, ensured that the manager’s funds led the rally in 2013, and now sit near the top of the sector over three- and five-year time periods once more.
The manager is defensive in his approach, and this caution paid off in the two market boom-and-bust cycles outlined by Spear.
For this reason he tends to underperform in strong bull markets such as the ones in 2009 and 2010.
Performance of funds in calendar years since 2008
| Name | 2013 (%) |
Rank | 2012 (%) | Rank | 2011 (%) | Rank | 2010 (%) | Rank | 2009 (%) | Rank | 2008 (%) | Rank |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| FTSE All Share | 10.96 | 12.3 | -3.46 | 14.51 | 30.12 | -29.93 | ||||||
| Invesco Perp High Income Inc | 16.77 | 2/98 | 7.67 | 89/96 | 8.99 | 1/90 | 10.94 | 70/88 | 9.81 | 75/76 | -19.42 | 4/75 |
| Invesco Perp Income Inc | 16.55 | 3/98 | 7.69 | 88/96 | 8.59 | 2/90 | 10.29 | 73/88 | 10.55 | 74/76 | -19.94 | 7/75 |
Source: FE Analytics
The difference over the past year seems to be that many of the defensive sectors have been outperforming the general market – Woodford has not changed his approach.
While Spear acknowledges his funds will not satisfy the most ethical of investors thanks to their high weighting towards tobacco companies, he says that people know what they are getting with Woodford, which is another of his strengths.