Last week marked the 25th anniversary of Invesco Perpetual High Income fund, one of the most widely held funds in the UK. Performance has been nothing short of superb so the fund retains a huge following – £1,000 invested at launch would now be worth £7,155, plus £3,616 would have been paid in income.
All but eight months of those 25 years have been under the stewardship of the renowned Neil Woodford, and to my mind it is his refreshingly long-term philosophy that has brought success. To him, ‘long term’ means 10 to 15 years not just a few. It’s an approach that allows him to look past the short-term ‘noise’ and visualise the future of a business or even a whole industry.
The most spectacular example was tobacco stocks in the late nineties. At the time most analysts felt the tobacco sector would face devastating litigation costs. Neil Woodford took a more sanguine view feeling these concerns were overplayed and that tobacco firms at least had the advantage of huge barriers to entry – after all no-one else was likely to set up a new tobacco company. The sector soared over the following decade as investors began to appreciate the growing dividends on offer.
Just as important as backing the right sectors is avoiding the disasters. In the late 1990s banks were the largest sector in Neil Woodford’s portfolio, but by 2003 he had sold out, avoiding the worst of the sub-prime crisis in 2007-8. Even now he believes they are un-investable.
Perhaps even more famously Woodford avoided technology stocks during the internet boom in the 1990s. In fact he was castigated for doing so as he underperformed significantly during that period. I remember him uncharacteristically banging his fists on the desk saying there would be an almighty crash. Eventually he was proved correct. In this way Woodford has been an excellent custodian of investors’ capital. He has the courage to back his own conviction and stick with it – and more often than not he has been right.
However, investors’ memories are short. One company recently recommended investors sell Neil Woodford’s funds on concerns his funds have grown too big to manage, and that he lacks the flexibility to move into mid and small caps. I found this rather depressing because it shows little understanding of how Woodford actually operates. It is true he can’t shift significantly into medium-sized and smaller companies running such a large fund, but he has never done so anyway, even when the fund was much smaller. I believe he can continue his long-term, disciplined approach successfully.
Smaller companies are, in fact, a minor part of this. Mr Woodford has 4-5 per cent of his Income and High Income funds invested in unquoted companies, small, early-stage enterprises where he is taking a 15-year view of them becoming much bigger businesses. This ‘private equity’ facet of the fund is little discussed, but it has the potential to add some value against his peers. Indeed Woodford believes one or two of these holdings will start to mature over the next year.
Naturally Woodford’s prevailing views always attract interest, and they haven’t changed much over the past few years. He feels pessimistic about the UK economy and favours strong companies in control of their own destiny – as opposed to those at the mercy of economic health. He has also felt for some time that there is great opportunity in the pharmaceuticals sector, which he describes as “profoundly undervalued”. He has over 30 per cent in healthcare stocks, a typically punchy position reflecting his level of conviction. Like tobacco in the 1990s, he believes it’s a case of enjoying the high level of dividends and patiently waiting for other investors to recognise the potential.
Whilst fund size can undoubtedly affect an investment process, I believe Neil Woodford’s style allows him to run very large sums of money successfully. As ever he has clearly articulated his views, so it is up to the adviser or investor to decide whether they agree or disagree with his stance – and invest accordingly. I retain a substantial amount of my own portfolio with his funds, and I regard this as a core holding. I am happy to ignore the short term noise and continue to back one of the most successful UK managers of our time.
Mark Dampier is head of research at Hargreaves Lansdown