Loyal Neil Woodford investors may be wondering, after a recent spell of poor performance, whether they may have been better off sticking with his old Invesco Perpetual funds instead.
After thirty years with Invesco Perpetual, the star manager – who had built up his funds to more than £30 billion – famously left the firm four years ago to set up his own business and launch the flagship Woodford Equity Income fund.
The Invesco Perpetual funds he left behind – Income and High Income – bled billions in assets as many investors who had enjoyed great success under his watch loyally followed him to his new venture. And, for a while, they were vindicated in their decision.
Laura Suter, personal finance analyst at AJ Bell, says: “Investors who moved over to Neil Woodford’s new fund after he left Invesco would initially have been over the moon. On its three-year anniversary, the Woodford Equity Income fund was way ahead of its peer group as well as the Invesco funds Woodford previously managed.”
Indeed, three years after launch, the Woodford fund had returned a meaty 39.3% compared to an average of 19.4% from the UK Equity Income sector. Meanwhile, the Invesco Perpetual High Income fund had returned 28.6% – no mean feat considering the manager had had to deal with heavy outflows as well as having to replace key team members.
Recent Performance has Struggled
But the past year has been a difficult one for both funds. Their notoriously contrarian styles have struggled while global stock markets have soared and a number of stock-specific issues have seriously hit performance.
Over the past year Invesco Perpetual High Income is down 4% and Woodford Equity Income 13.6%. Meanwhile the average UK Equity Income fund is up 2.5%. It is worth noting out that, due to their lower yields, both funds actually now reside in the UK All Companies sector.
The disappointing performance has seen investors pile out of Woodford’s flagship fund in their droves – assets under management have shrunk from more than £10 billion to £6.5 billion. It has also been bumped from a number of broker best buy lists and downgraded by Morningstar analysts to a Bronze rating – the same rating as the Invesco funds.
Brian Dennehy, managing director at FundExpert, suggests investors look elsewhere: “In the two years before Neil left Invesco Perpetual performance had been very average and, based on this alone, there was no reason to chase him to his new home. Nor was there any track record to suggest investors should stick with Mark Barnett because he would do something different and better.”
Morningstar Analysts Stay Positive
Morningstar analyst Peter Brunt remains positive on Woodford’s fund overall but has concerns over some stock-specific problems. Brunt says: “While contrarian investing comes with a degree of risk, and issues could be expected from time to time, the nature of some of the problems and position sizes in the portfolio give us cause for concern.”
Woodford scores Positive on the Morningstar People, Price and Process pillars, and Neutral on Parent and Performance. Brunt adds: “For investors who can tolerate periods of underperformance, the fund still has long-term investment merit.”
Barnett has a similar approach to his predecessor. Both funds have high exposures to the financial services, industrials and healthcare sectors. Both have around 70 holdings but Woodford’s high conviction approach is evident in the fact that his top 10 positions account for 42% of assets.
Barnett’s fund has a Positive rating for People, Process and Performance pillars and Neutral for Parent and Price. It also has a two-star performance rating compared to Woodford’s one-star.
Time to Look Elsewhere?
Dennehy says investors don’t need to choose between the two managers but should, perhaps, look elsewhere instead. The top performing UK Equity Income fund over the past year is the recently-launched Livingbridge UK Multi Cap Income, which has returned 18.6%.
There are no funds in the UK Equity Income sector that currently have a Morningstar Gold rating, but four do have a Silver rating from our analysts. Among these are the JOHCM UK Equity Income and Threadneedle UK Equity Income funds, which have returned 11.4% and 6.3% respectively over the past year.
Suter adds: “Woodford hasn’t deviated from his investing style, which would have been a bigger concern than a period of underperformance. Long-time investors will remember his refusal to buy the stocks ahead of the dotcom bubble bursting and will know he has weathered poor periods before and come out the other side ahead of his peers.”
What the Managers Say
Mark Barnett, manager of the Invesco Perpetual Income and High Income funds, says: “I’m owning up to the fact it hasn’t been a great time but I’m not going to change the way I do things. I believe that this process, which has served me very well over many, many years , will come back strongly in the future.”
Neil Woodford, manager of the Woodford Equity Income fund, says: “Much of what we have seen in the first half of 2018 is supportive of our over-arching investment strategy. Financial markets, however, have not reacted in the way we had expected. As a result, our investment strategy has not yet been rewarded but we are absolutely confident that it ultimately will be.”
