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Chris Gilchrist: Woodford’s management now under the microscope

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.

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Perfectly valid comments, but I wonder why commentators, journalists and analysts weren’t more vocal ages ago?

    All the information was out there, in reports, reviews and on various websites and not least on Woodfords own literature. Are Unlisted securities and start ups in an open ended fund really suitable? Can you really call this investing? I classified it as gambling, but as I am no longer authorised to give advice I had to confine matters to my own personal investments. Where (as always) was the regulator? Their barn door will probably need oiling again. The horse hasn’t just bolted it’s in the next county by now.

    I invested a small amount of my own money. I was well aware it was a gamble and I took a long term view. I haven’t lost money (yet) as I haven’t taken my chips off the table. If Woodford doesn’t fold and keeps going I guess in the long term I may actually make a little money as the high risk funds are not liquid enough to be disposed. Even if it falls to zero the size of my investment in the fund is well within my capacity for loss and the overall portfolio is hardly likely to notice.

    Pity HL and their clients didn’t do likewise. They too have some serious questions to answer. This is what can happen when a platform strays outside its main purpose. Should platforms, which in fact are nothing other than a utility, actually provide advice and recommendations at all?

  2. Talking of things under the microscope, I am yet to see anybody reporting about the fact that the ACD on the Woodfund fund is Link Group. Link purchased Capita Asset Services, which owned Capita Financial Managers. Capita Financial Managers have a history of being ACD on funds that have failed catastrophically e.g. Arch Cru and Connaught.

    It’s probably the same people doing the same job, despite the change of ownership, so one has to ask whether that outfit are fit for purpose.

  3. Julian Stevens 14th June 2019 at 9:46 am

    As I’ve posted elsewhere, the truly remarkable correlation between the performance of INVESCO’s Income & High Income funds whilst Woodford was running them and the FTSE Mid-250 Index raises the question as to whether he really was such a superstar. Investors could have achieved much the same level of performance in a much cheaper tracker fund.

    The other two questions are why did he depart so radically from a tried and proven formula and why did so many advisers and institutions such as HL fail to notice the significance of that departure.

    Like Harry K and a few other colleagues to whom I’ve spoken, I took a small punt on Woodford’s Income fund in its early days but switched out about two years ago. It was beginning to look like a laggard even then. If all us small players could see that long ago that the fund was falling severely short on our expectations, why ever did the likes of HL and SJP stick with it for so long? All their self-proclaimed analytical firepower seems to count for nothing.

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