When the topic of Neil Woodford comes up at our family dinner table, it’s safe to say that an investment storyline has entered the mainstream consciousness. 
It shouldn’t be surprising. The British love of a ‘rise and fall’ storyline, and associated schadenfreude, means the whole sorry story has been pored over by financial and mainstream publications alike. The saga has produced a whole raft of fiery takes and ice-cold analyses of Woodford’s investment style and the lessons that should be learned consequently.
Inspired by Spinal Tap’s bassist, Derek Smalls, our view falls somewhere in-between, as lukewarm water if you will. While accepting that many valid concerns have been raised in the wake of the gating of LF Woodford Equity Income fund, there is the danger that incorrect conclusions could be drawn.
The liquidity of a fund’s underlying investments and the potential for a mismatch with client requirements has garnered much attention following the difficulty the fund has had in exiting certain positions.
Liquidity is, though, as the name suggests, a somewhat fluid concept. Many funds, including our own, use the number of days it would take to liquidate a position (assuming you could achieve a certain proportion of average daily trading volume) as a measure of liquidity and portfolio risk.
As a metric it has worth: it is simple to measure; easy to understand; and in normal circumstances is a reliable indicator of liquidity. It does, however, also have flaws. In a crisis, when investors might face the greatest pressure from fund redemptions, historic measures of liquidity have limited relevance. Quoted volume statistics also often fail to reflect off-market block transactions – meaning that true, underlying liquidity is greater than first thought.
Overall, though, we are not overly concerned about the liquidity risk of our funds for one simple reason – size. At its peak the fund reached over £10bn in assets – meaning a 1 per cent holding in the median-market cap FTSE 250 company would necessitate acquiring 7 per cent of the stock. It is this absolute size that investors should be concerned about, not the size of a holding as a percentage of the overall fund. As flows are directed to larger fund houses and ‘me too’ tracker funds this is a problem that is likely to reoccur at some point. For investment boutiques with truly actively managed funds, this is less of a problem.
Woodford’s travails have also emboldened those who like to proclaim that value investing is going the way of the dodo.
Often labelled as one of the UK’s most prominent ‘value investors’, the negative publicity he’s receiving has cast an unwelcome pall over the rest of us. The perception of Woodford as a value investor, however, has often felt incongruent with the make-up of his portfolios. His appetite for early-stage unquoted investments is not one that is commonplace in most traditional value investors.
At a time when both growth and ‘low volatility’ quality stocks have massively outperformed value, and the valuation gap between the styles have reached record levels, it’s yet another brickbat to be avoided. Those sounding the death knell for value argue that structural changes in the global economy will cause this outperformance to persist indefinitely. This appears overstated. It is true that some industries have changed to such a degree in the last decade that is hard to see a positive outcome for companies on the wrong side of the trend. The retail sector offers a prime example, with both retailers and property-owners facing a challenging future.
Investors, though, must be wary of the dog that didn’t bark. Those searching disruption often see it everywhere, even when the evidence is less clear-cut. For example, while electric vehicles, autonomous driving and ride-sharing are all exciting developments, the timing and magnitude of their impact on the automotive sector and its supply chain remains uncertain.
The greater headwinds facing the sector right now are macro-economic and cyclical in nature – slowing global growth and trade wars are of far greater relevance. The same is the case for value investors. In these ‘interesting’ times, any stocks that demonstrate greater-than-average cyclicality or are particularly exposed to Brexit and trade-war risks have fallen out of fashion. Eventually this will pass.
In the wake of a crisis or industry earthquake, everyone should take the time to learn the appropriate lessons.
Neil Veitch is manager of the SVM UK Opportunities fund. The views expressed above are his own and should not be taken as investment advice.