The Woodford Myth – should you buy into it?

Is the launch of the new Neil Woodford fund more as marketing phenomenon than an amazing investment opportunity?  Should you get on the bandwagon?

There are some urban myths around the Woodford track record.  If you are considering the new fund take a cold shower first, don’t be seduced by the wall to wall advertising, and then soberly consider if it is right for you

It all depends whether you are investing for growth or generate a regular income.

Are You Investing For Growth?

Most investors are interested in growth (strictly speaking “total return”, that is capital growth plus reinvested income).  And the main Invesco Perpetual funds of Neil Woodford (Income and High Income) were total return funds – for us the “income” adage was a bit of a misnomer.

That means we can consider the Invesco Perpetual Income fund against peers in the UK Equity Income and also UK growth funds (which populate the UK All Company sector).

Over the last 10 years the Invesco Perpetual Income fund was a top performer compared to other equity income funds, with Liontrust and Schroder not too far behind.  But over 5 years the fund is placed 33rd.  Hmmm.

If you broaden out the comparison to include growth funds, over 10 years it is 17th, and over the last 5 years it is 123rd.  Ouch.

How About Income Investors?

Here the priority is not just income, but a consistent growth in that income – this is absolutely vital to long term income investors e.g. through a long retirement.

Our favoured funds (our Income Aristocrats) include Artemis Income, BlackRock UK Income, and Standard Life UK Equity High Income.  The Woodford funds were on our short list, but did not make the final cut because the payout was not sufficiently consistent, and high weightings in defensives (i.e. pharmaceuticals) would hinder the income growth prospects of the fund

In summary, even if you believe Woodford has god-like qualities, you can’t buy past performance.  It is gone.  Plus on closer examination, that past performance isn’t always what the headlines would have you believe.

What Performance Can You Expect?

The performance of a new fund in the first 12-24 months is typically driven by luck rather than the skill of the fund manager, even if it is Neil Woodford.

Why? Because the accident of when the fund is launched drives early performance; and, if we are honest, none of us, not even Neil, knows what will drive markets in that period.

Will the Woodford style be a positive or negative over the next 12-24 months?  No one knows – sidestep anyone who says they do!

So what DO we know? And what are the most likely scenarios?

  • In US equities over-valuation, complacency, and cheap money have created a state of instability…
  • No one knows the timing of when the market will fall and correct this situation (as with the final single snowflake which causes an avalanche)…
  • But history informs us that these conditions, on average, lead to falls nudging 50%
  • The UK and other developed markets cannot escape if (when?) such falls occur

Three Scenarios For Woodford

The above means that in the next 12-24 months Woodford will be hailed as a hero or pilloried based on the accident of the timing of the launch.

We see three broad scenarios:

  • Scenario 1.  The market going sideways for a couple of years. Perhaps he’ll get a boost from M&A in favoured sectors.  Performance will be dull though positive
  • Scenario 2.  The market falls sharply.  His fund will lose money but not as much as most of his peers
  • Scenario 3.  The market continues to make solid progress, as a minimum.  This fund will tend to underperform most peers

Should You Buy a New Fund?

Our view is that buying new launches is mostly pointless unless the fund is unique, for example providing access to an asset class or strategy not available elsewhere – this fund doesn’t meet either of those criteria.  So we would wait at least 6 months before considering the fund, and then begin to compare the actual performance with the many alternatives.

In the meantime, there are plenty of outstanding alternatives, in fact 122 better funds if you are investing for growth (based on the last 5 years of performance).

Will YOU Buy This New Fund?

Despite these reservation of ours, many Woodford fans will buy the fund, plus a phalanx of others seduced by a shiny new fund and compelling marketing, but little else of relevance to whether this is likely to be a good, bad, or indifferent investment. That will be enough to make this one of the biggest fund launches ever.

The Cult of The Fund Manager remains intact, even if very silly.

Why buy a new fund with no track record when you can buy an existing fund with an established track record?

Say “thank you but no thank you” to the wall to wall marketing.