Leaving Invesco Perpetual for his new self-titled venture has allowed Neil Woodford to start with a “blank sheet of paper” compared with rivals he says are bogged down by legacy infrastructure.
However, as you would expect, there will be no huge surprises in the investment strategy of Woodford Investment Management’s first launch, a UK equity income fund, which will follow a similar path to those of the income funds he ran at Invesco.
Woodford had to take a back seat while chief executive and fellow ex-Invesco colleague Craig Newman started to build the business, having finished his gardening leave at Invesco Perpetual only last week after 26 years at the firm.
But speaking to Money Marketing after officially joining Woodford Investment Management, Woodford is keen to stress that the firm will be looking to grow into a large-scale asset management house with a diverse range of investment vehicles, rather than being seen as a boutique built around his income fund.
He is more coy on the specifics of such expansion, saying any move into areas such as global income, bonds or emerging markets would be driven by finding the right managers with the right expertise.
Early-stage science opportunities
Woodford currently sees “incredible opportunities” in the area of early-stage science start-up companies. Such investment ideas are likely to form part of his income portfolio and there is the possibility of launching a specialist vehicle to capture such opportunities.
“My interest in smaller companies is largely driven by what I think are the incredible opportunities in early-stage science. These are start-up businesses, whether quoted or unquoted, which are based on scientific discovery and innovation that is coming out of British universities and research houses as well as internationally.
“This is great science which has an acute need for capital but the problem is capital provision. There are very few investors who have the means or desire to invest in [these start-ups]. So I think this creates a fantastic opportunity.”
When Woodford announced he was leaving Invesco, he said it was based on a “personal view about where I see long-term opportunities in the fund management industry”. He believes much of the asset management sector is held back by having to deal with legacy infrastructure, which is hard to unwind and is a big drag on costs.
Woodford hopes his outsourced model, using Capita as the ACD, Northern Trust for fund administration and Bloomberg Aim for dealing, will create efficiencies that allow the firm to operate at a lower cost base compared with rivals.
He says: “If you had a blank sheet of paper to build a fund management company, it should have a different structure. The majority of big fund groups and certainly the one that I’ve been part of for 26 years are incumbents that have legacy infrastructure costs, most of which actually come from having middle- and back-office functions in-house.
“This then gets reflected in the charging cost so there is a scale advantage in outsourcing our opportunities to create an inherently lower cost structure.”
So just how big will the new business be? Although it is still early days, Woodford says the company was never envisaged as a “constrained hobby boutique” and will eventually become a “scale fund management business”.
There are currently around 20 employees, with Newman at the helm. Nick Hamilton, who also worked previously for Invesco Perpetual as head of global equities, will act as chief operating officer while Gray Smith will oversee the legal aspects of the firm.
Woodford’s role is head of investments. His decision not to take the helm at the firm that bears his name reflects his belief that managers often find themselves distracted from managing funds.
“It’s important that you don’t encumber managers with extraneous and irrelevant stuff, as many fund managers in large organisations with legacy issues and bureaucracies find themselves tied up in. I have known it and it can drag fund managers into things that they shouldn’t be involved in,” he says.
Expect no changes for income investing
There won’t be any surprises in his own equity income strategy, the CF Woodford Equity Income fund.
“It would not be possible to completely clone the precise nature of my previous fund but the strategy will be the same with the same sector biases, the same prominent positions,” he says.
Perhaps the most relevant of Woodford’s major positions right now is AstraZeneca – the top holding in the £3.6bn of SJP funds he is running – following the recent takeover bids for the UK-based company by US pharmaceutical giant Pfizer.
Woodford believes AstraZeneca has an “attractive independent fut-ure” and argues that any disruption from a possible acquisition to Astra’s “rapidly maturing” drugs pipeline could prove “incredibly value destructive”.
Another of Woodford’s well-known sector calls that he has no intention of reconsidering anytime soon is his avoidance of banks, describing the expectation that domestic UK names will be able to pay hefty dividends again as a “myth”.
“These banks don’t have enough capital and too much leverage so the regulator will continue to grind away and they will either have to shrink their balance sheets or grow more capital,” he adds.
“By implication what this means is that the notion that these companies will be giving out gigantic dividends is a myth.”
HSBC proves the exception to this rule as the only bank holding currently in Woodford’s portfolios thanks to its “better capitalised and profitable business” and more attractive level of dividend.
Woodford is more optimistic on the outlook for another area of the financial services sector following the radical reform to annuities announced in the Budget. L&G is currently a sizeable position in Woodford’s SJP funds and he is comfortable the changes to annuities can bring benefit for its business.
He says: “L&G will look less like a traditional life insurance company and more like a fund management business going forward. It might mean lower margins but what that might also mean is less capital intensity as well.”
These changes should also see equities feature more prominently in the retirement market, Woodford argues. He adds: “The fact is most people retiring today have an average life expectancy of 20-25 years so why is it not appropriate to have equities in their investment strategy with this horizon?
“To my mind equities have a very important role to play in this space and I’m delighted that the Government has taken this bold decision, I think it is great for savers.”
Investors may be a little more surprised to hear that Woodford’s new fund will sit within the IMA UK Equity Income sector, especially after his previous Invesco Perpetual High Income fund was recently kicked out of this sector for not meeting the appropriate yield target.
Woodford is confident that the dividend and yield opportunity in the current market should allow the fund to stick to the yield target for “the foreseeable future.”
However the manager says he will not be pressured into chasing yield and keeping income targets if this backdrop should change. He adds: “I recognise the importance of delivering yield and dividend growth to the client.
“But what is much more important is total return and protecting capital. Sometimes it can be entirely inappropriate to try and maximize yield and have to deliver an income target. We have to be vigilant about that.”
A final word of caution
With the FTSE 100 pushing towards 6,800, driven by a re-rating in valuations, and a distinct lack of earnings growth in corporates, some might question if now really is a good time to set up a UK equity fund?
Although Woodford says he has never been interested in timing markets he believes that against this current backdrop a fund manager’s role is likely to become “more challenging” as markets struggle to deliver the level of returns seen in recent years. He says: “It would be unrealistic to expect markets over the next 3-5 years to deliver anything like the returns that they have in the recent past.
“So the job of a fund manager now is to make sure you don’t expose investors to overvalued equities.”
The manager also sounds caution on the current optimism surrounding the UK economy and when asked if the UK property market is becoming overheated responds in a nutshell: “Yes”.
He highlights consumer debt and the UK’s balance of payments as particular risks to a sustainable recovery as well as external weakness in the Eurozone, emerging markets and even the US.
“There is plenty to worry about and although there is almost universal optimism around about UK growth I would voice a note of caution as to whether this growth is deliverable,” he says..
The UK economy
“Although there is almost universal optimism around about UK growth I would voice a note of caution as to whether this growth is deliverable.”
The property market
Woodford also sounded caution when asked if the UK property market is becoming overheated, answering in a nutshell, “yes”.
“It would be unrealistic to expect markets over the next 3-5 years to deliver anything like the returns that they have in the recent past.”
Woodford argues that a fund manager’s job is likely to become “more challenging” as they avoid exposing investors to areas of the equity market that have become overvalued.
Opportunities in early stage science
The star manager says there are “incredible opportunities” in start-up businesses within scientific discovery and innovation which have “an acute need for capital”.
His new equity income fund
“It would not be possible to completely clone the precise nature of my previous fund but the strategy will be the same with the same sector biases and the same prominent positions.”
The timing of a possible acquisition from Pfizer could prove “incredibly value destructive” to Astra’s rapidly maturing pipeline, says Woodford, who has long since been a supporter of the UK pharma giant.
Domestic banks Lloyds, RBS and Barclays still don’t have enough capital and too much leverage, according to Woodford. He says the idea that these banks “will be giving out gigantic dividends is a myth”.
Woodford is optimistic about the recent radical reform of annuities. He expects his holding in L&G will look “less like a traditional life insurance company and more like a fund management business going forward.”
Starting with a blank sheet of paper
Woodford Investment Management chief executive Craig Newman says starting from scratch and using an outsourced model will give the firm a competitive advantage compared to rivals struggling with the costs of legacy systems.
Capita will act as ACD, Northern Trust will deal with fund administration and Bloomberg AIM with dealing.
The firm unveiled its first investment product, a UK equity income fund to be managed by Woodford in February. St James’s Place also switched £3.65bn from three of its funds from Invesco over to Woodford Investment Management.
The journey has not been an entirely smooth one with former employer Invesco Perpetual fined £18m the day before Woodford’s official departure for exposing investors to unacceptable levels of risk in fifteen of its funds, including those managed by Woodford. Woodford and Newman are not prepared to discuss the fine or its timing.
Newman, who joined Oakley Capital last November as a stepping stone to launching Woodford IM, says this outsourced model will allow the firm to deal with the large amount of assets many commentators expect to be attracted into the CF Woodford Equity Income fund at launch.
“Our scale is the scale of the biggest players in the industry and we are a team of people designed to sit around Neil and our infrastructure to make us a credible business,” says Newman.
He says such a structure means the firm will be free of the legacy headaches experienced by rivals. “You can only do this outsourcing model if you are new as every other business has some form of legacy structure,” he says.
Newman says he wants to see greater transparency in fund manager costs and as such the fund’s TER and AMC will effectively be the same, with the firm absorbing administration costs. There will be a number of share classes with preferential deals for certain distributors.
The business currently has 24 people on board with four partners.
Alongside Newman, Nick Hamilton, who was also previously head of global equities at Invesco Perpetual, will act as chief operating officer while Gray Smith will oversee the legal aspects of the firm. Woodford himself is set to take on the role as head of investments.
The initial partnership structure has still to be confirmed as part of the FCA’s final approval before the firm can begin trading, expected in the next month.
What advisers are saying about Woodford’s new launch:
Thomas and Thomas Financial Services managing director Darren Lloyd Thomas: “Personally as much as I respect Neil and think he is a fantastic manager, I would definitely want to see a couple of years track record behind any new venture that he takes on before we would go near it, although I will be extremely interesting to look at what he does with the business.“It is also fantastic to see someone with such pedigree launching something new when so many funds are being amalgamated and soft-closed leading to less choice in the market.”
Murphy Wealth partner Adrian Murphy: “I don’t think you should automatically just follow Woodford. He probably had a very good team around him at Invesco so I think it should be one of those ones that goes on the watch list for now.“We will always be interested in new opportunities in terms of his fund launches but his interest in going into the start-up science business space wouldn’t be right for many standard retail clients.”
Bestinvest managing director Jason Hollands: “One of the things Woodford is having to do now that he hasn’t had to do to this degree in some time is meet intermediaries and be involved very directly in the marketing of the fund. “Now he is having to hit the road and his firm has promised to be very communicative so while he has made it very clear that he won’t be running the business equally he will have to devote some amount of time to marketing.”