Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Morningstar Fund Analyst, Pete Brunt, to discuss Woodford.
Hi, Pete.
Peter Brunt: Hi, Emma.
Wall: So, why have Morningstar analysts taken the decision to downgrade Woodford's fund?
Brunt: So, it's a number of reasons. We've been looking at the portfolio pretty closely for the past six to eight months. A number of things going on that we have been trying to get a handle on.
Talking about the kind of complexion of the portfolio to start with. Two years ago, the fund had a pretty significant allocation to large and giant-cap companies, which are typically more liquid. Over the last two years the portfolio has shifted pretty heavily to the other end of the spectrum, more towards smaller-sized companies and this is typically in a less liquid part of the market. And that's really been quite a striking evolution to the point where less than 25% of the portfolio is invested in large-cap companies.
This has coincided with significant redemptions, which has also coincided with some challenging performance for the fund. So, the work that we've been doing over the past few months is to understand how the group has dealt with those redemptions. Obviously, it's an open-ended vehicle. So, investors require daily liquidity.
And I guess, the conclusion of all of our work is that whilst the group has comfortably met those redemptions and we don't believe that they have negatively impacted Neil Woodford in his investment conviction, where he wants the portfolio to be, we do believe that the fund now is still just over $6 billion in assets under management, so it's quite a sizable fund and where it's positioned means that it's going to be less nimble in terms of where he wants to find those investment opportunities than others in the market.
Two, I guess, the focus really now is on a different part of the market where we've really known Neil, where his strengths lie really, which is, typically making big macro calls among larger and giant-cap companies. And we believe that in terms of resources, perhaps they don't look now as strongest from other competitors given that it's looking far, far smaller-cap focused than previously.
And lastly, as I mentioned, some of the performance challenges have come in a nature that we feel a little bit less comfortable with. There have been a few investments in companies that we would consider a little bit more binary in nature that we feel are probably a little bit harder to have a true grasp on valuations and the size of those positions in the portfolio have made us feel a little bit less comfortable.
Wall: I think many investors would have made the assumption that the downgrade was based on just one of the Ps, performance, because it has been so very challenged over the last 12 months. But it sounds like the downgrade is based on process as well?
Brunt: Yeah. Look, I mean, there's no hiding from the fact that the performance has been poor. However, the important thing to note is that Neil Woodford has been investing money for over three decades now. And if you were to take that track record in completion, this is really just a short-term blip in that track record. We prefer to look at five-year periods rather than one or two-year periods. So, as I mentioned, the performance is disappointing, but actually not the driving reason of this downgrade. It's more the nature of the performance and like I said, the complexion of the portfolio as it is today.
Wall: And finally, despite these challenges, do you remain, or do you still have conviction in Woodford to outperform over the long term?
Brunt: So, that's a good question. And you will note that it's gone from a Silver to a Bronze rather than a Neutral. And that's an important message, too. Bronze, we still have a positive view. And in answer to your question, yes, we do believe this fund can outperform in the future. He has a made a career on making prescient calls. He has taken a view that the UK economy is far under value, the most undervalued he has seen in his entire career and that's why he has positioned the portfolio as he has done. So, we are still positive in terms of the outlook. We are just a little bit less comfortable than we were before with regards to the factors that we've mentioned so far.
Wall: Pete, thank you very much.
Brunt: You're welcome.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
