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Mark Dampier: In Woodford we trust

Our investment objectives are always challenged in times of extreme market volatility. Despite investing with the intention of keeping holdings for the long term, many investors I speak to become more short-term-focused, often on the next three to six months. As a result, they attempt to yo-yo between risky, volatile assets and those they perceive as safe havens. This is an unsustainable investment strategy.

The crux of the matter is that shortterm moves are impossible to forecast. Economies are poised on a knife edge, with low growth on one side and recession on the other. Central banks and politicians have little room for error and actions such as lowering VAT, tax or increasing spending simply add to the underlying problem of too much debt.

During these times, I like to invest in funds whose managers have clear objectives and longer-term thinking rather than being swayed by short-term fluctuations. I have highlighted Neil Woodford’s Invesco Perpetual highincome fund many times and I continue to do so today. No one really knows if the Western world will slip into another recession or if we face a sustained period of low growth but, for many of Woodford’s holdings, the exact trajectory of GDP is somewhat academic.

Last year, Woodford (pictured) was heavily criticised for not being invested in more economically sensitive stocks. Yet he has maintained his view that the West has got to tackle its debt problems and, in doing so, will inevitably experience a long period of lower growth. Woodford is often portrayed as a bear but, although bearish on the economy, he is upbeat on the prospects for the companies in his portfolio.

Neil Woodford

He believes he owns a collection of shares that will see investors through difficult times and will, in due course, increase in value. In particular, he high-lights pharmaceutical stocks as showing tremendous value and he has a considerable overweight in this sector.

The obvious factor in Woodford’s favour is that an equity income fund with a yield of around 4 per cent compares well against persistently low interest rates – especially if the income can grow over time as underlying companies increase their dividends. There must surely be a revaluation of these stocks at some stage but many investors seem to prefer to pile into government debt (that is, gilts). Yet with a 2.4 per cent gross yield on the 10-year gilt, do you really expect an inflation-matching return?

I would prefer to own a fund, or indeed individual companies, which look to be well financed, are economically insensitive and have yields over 4 per cent net which could rise further. If we are (as I suspect) in a low-growth environment, then income will play a much more important part in shareholders’ overall returns. Therefore, Woodford’s funds, and others with a similar strategy, are excellent places to invest for the long term. And for those who believe the markets have gone nowhere in the last 10 years (which as measured by the FTSE 100 is by and large right), factor in the reinvestment of dividends plus Woodford’s expertise and the result is quite different. Over the last 10, years the fund is up by 128 per cent.

Mark Dampier is head of research at Hargreaves Lansdown

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. I disagree that lowering taxes would simply add to the problem of too much government debt. The Hong Kong authorities lowered rates and the result was an increase in tax receipts, partly because so doing stimulated the economy and partly because tax evasion/avoidance reduced.

    As for the 10 year record of Neil Woodford’s High Income fund, hadn’t you heard, Mark? The FSA insists that we take no notice of past performance, as it offers no guide to the future. In fact, the FSA even commissioned a study to prove its point or, rather, to disprove the findings of a study already carried out by the IMA. Unfortunately for the FSA, the conclusions of the study it commissioned not only reinforced those of the IMA’s study but concluded even more strongly that past performance DOES represent a very good guide as to what the future may hold. Oh dear, another waste of OPM.

  2. Julian – last time I looked, tax evasion was illegal, so if we’re being asked to cut taxes to stop people acting illegally, then I’d suggest there’s some warped logic at large. What’s next, giving muggers our wallets to stop them stealing them?

  3. @Mark

    When both absolute and marginal rates of taxation are high it is natural for wealth creators to minimise the impact on income and capital. If rates of taxation are reduced so that the fractional cost of avoidance is made pointless so the total tax take will increase. This is not only true of vibrant, growing economies like Hong Kong but also in large nation economies like the UK.

    We would all benefit from a system where no tax is payable on income of >£10k and thereafter a flat rate of 25% applies.

  4. @Simon

    Someone earning £22,000 (which is the national average income) would be worse off under a flat rate tax of the sort you suggest.

  5. Mark.

    Kershaw could not give a monkey’s about the great unwashed earning the paltry ‘national average’. How’s he gonna make any money out of them??

  6. @WTF

    Whilst I am used to vitriol from anonymous inadequates in these postings I do wonder what I did or wrote to warrant your post.

    Perhaps you could enlighten me.

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