The Share Centre’s Sheridan Admans is increasing his position in Neil Woodford’s Equity Income fund and Patient Capital Trust despite their recent poor performance, saying they are ideally placed to take advantage of low valuations in the UK market.
Launched in June 2014 to much fanfare, LF Woodford Equity Income celebrated its three-year anniversary last June as the best-performing fund in its IA UK Equity Income sector, with gains of 38.89 per cent.
Its record has been lacklustre since then, however, with a number of stock-specific issues seeing the fund fall 15.69 per cent from its peak, making it the worst performer in its sector over the past three years.
Performance of fund vs sector and index since June 2017 peak
Source: FE Analytics
The manager's Woodford Patient Capital Trust has done even worse. The biggest UK investment trust launch in history, raising £800m, it raced on to a double-digit premium before quickly falling into negative territory and is now down by more than 20 per cent since launch – making it the worst performer in its IT UK All Companies sector since it began trading.
Performance of trust vs sector since launch
Source: FE Analytics
However, investment manager Admans continues to back Woodford, saying that to some extent he has become a victim of his own success.
“Yes, he has had blowouts, but what manager doesn’t? I think the problem you have got is that if you are Neil Woodford you have a high profile and your blowouts will have a high profile,” he explained.
“But I have got to say some of these stocks seem to have turned around recently, we have certainly seen the price move up with Provident [Financial]. When everyone was saying ‘this is bad news, this is terrible’, he said ‘this has been oversold, it will come back’ and we have seen that in a shorter time period than I expected. But you know the problem is the market is punishing everything and anything at the moment when there is any bad news.”
Data from FE Analytics shows that Provident Financial is up by more than 50 per cent since its February low, but is still down 69.51 per cent since its 2017 high.
There have been concerns that outflows from LF Woodford Equity Income could lead it to become a forced seller of its unlisted holdings and some commentators suggested this was the reason it sold out of AJ Bell ahead of its IPO and shunned the latest rights issue in challenger bank Atom. However, the fund manager refuted this and Admans thinks the problem has been exaggerated.
“I’m sure that when you go from circa £10bn down to £7bn there is a call on your capital,” he continued.
“But he has not been pushed into a position where he has had to put the brakes on the fund like we saw with property after Brexit.”
This brings Admans on to the main reason he continues to back Woodford. The vote to leave the EU has not had as big an impact on the UK as most analysts expected and, with wages growing and inflation slipping back, The Share Centre’s view on the economy is well reflected in Woodford’s tilt towards small, mid cap and unlisted UK stocks.
“Large caps are going to get dragged along by the rest of the world, but I think the share prices are now reflecting that in a lot of companies,” Admans said.
“And if you look at the income yield on the S&P and the MSCI ex UK and then you look at the FTSE All Share, the income yield has been tipping up in the All Share. So I think you are getting some compensation now in a lot of the income ideas in the portfolio and I think I share his view of the world, which is investing in the UK is not as bad as people are saying.
“I saw Neil go through a similar cycle in 2000 when the world had changed, nothing was going to be like it was. When we talk about the cycle more generally, we are now in the latter stages, and it is a type of cycle in which an active manager that runs the type of stocks Woodford does starts to outperform and hopefully that is what we are buying into.”
Woodford’s contrarian position in UK-facing businesses is not the only reason why Admans is so positive on the manager. He also likes his stance on healthcare, a sector that The Share Centre has been a fan of for many years.
Admans said valuations looked attractive here even before “they got trod on because of question marks about what Trump was going to do with legislation” – and the sector’s defensive qualities are well documented.
“But I also think we are in a longer cycle of growth generally in healthcare because of the disrupters within that market,” he added. “We are seeing a lot of new products, devices and ways of doing things. Just the other day we had the stem cell research on multiple sclerosis saying they could extend the lives of suffers and so on.
“You know these are life-changing things we are starting to see come through and I don’t think the market reflects that. So we will get the growth of that market and the defensive qualities. And a big portion of Woodford’s portfolio plays into that.”
Admans’ backing for Woodford has proved to be timely. Shares in Woodford Patient Capital are up close to 9 per cent at the time of writing today after top holding Prothena – also a top-10 holding in LF Woodford Equity Income – announced a tie-up with biotech giant Celgene in a deal that could be worth up to $2.1bn. Is this the start of his long-awaited comeback? Only time will tell.