Neil Woodford may be a great investor. We can be pretty sure that in his tenure at Invesco Perpetual, he was a good investor. At Woodford Investment Management, the jury is out.
Regardless of that, advisers should evaluate any fund they may recommend to investors in the same way.
Despite having worked very closely with Mark Barnett at Invesco, Woodford didn’t recruit him or another senior fund manager for his new business. No doubt he’d have had to give Barnett a sizeable chunk of equity, but he would have benefited from having another grown-up in the room with him, just as Warren Buffett has benefited from Charlie Munger and Nick Train has benefited from Michael Lindsell. Successful managers are always subject to the risk of believing too strongly in their own stories. They need robust challenges and perhaps Woodford didn’t get enough of them.
Great investors can generate great marketing stories that help investors onto a profitable bandwagon: think of Fidelity and its promotion of Antony Bolton’s Special Situations fund, which helped thousands of individual investors achieve fabulous returns. Fidelity did the same with Peter Lynch’s Magellan fund in the US.
The trouble with the hype that Hargreaves Lansdown unleashed in favour of Woodford was that it did not draw investors’ attention to a complete change of style. Lynch always made his money in small-cap stocks; Buffett has made most of his in very large firms; Train only considers quality growth stocks. At Invesco, Woodford made most of his returns from big sector bets (negative banks, positive pharma and tobacco). But in his new firm, he deviated from that script. He added more unlisted investments to his portfolio than he had done at Invesco, and moved heavily into mid and small-cap stocks. This considerably changed the risk-return profile of the fund.
I wonder if Hargreaves will be able to demonstrate to regulators that it signalled the increase in risks strongly enough to investors.