Everybody Loves Neil Woodford

Published in Investing on 17 February 2010

But are they right...?

Neil Woodford has become so totemic among equity income investors that he seems almost beyond criticism. Advisers and analysts adore his two best-known funds, Invesco-Perpetual Income and High Income, even when they have been performing poorly. That's a measure of the man's reputation, and good news for him, because his funds have performed very poorly lately.

Over the past 12 months, his Income fund grew 11% against 30% for the FTSE All-Share, while High Income underperformed the UK Equity Income & Growth sector, growing just 11% against 22%, according to Trustnet.com. Both funds are bottom quartile over that period.

That is hardly the performance of an investment giant. So is Woodford finished, a broken man, a shattered remnant of the one-man investment behemoth he once was?

RosiesDad asks, RosiesDad gets

I have to declare an interest here. I have around 5% of my invested wealth to Invesco-Perpetual Income, which I use as a counterbalance to my portfolio of direct equities. I'm not buying any more units in his trust right now (I've got enough), but I'm certainly not selling either.

When I mentioned this in a recent article, a Foolish fellow calling himself RosiesDad posted the following comment: "Harvey, I'm interested to see you hold Invesco-Perpetual Income. How about some more articles about investing into funds for income? I'd be interested to know how you think the fund has performed recently and how it will perform in 2010 against its peers."

As I have a financial stake in the matter, I'm interested as well. And so will plenty of you (even those who wisely shun most actively managed funds), because Woodford currently manages an astonishing one-third of all the money in UK equity income and growth sectors.

Fave raves

Woodford has been managing his High Income since October 1988 and his Income fund since October 1990, and his investment approach hasn't changed in that time. He's a classic value manager, looking for companies whose share prices have been marked down yet offer the prospects of sustainable growth over the long-term.

His funds invest primarily in the UK, and are crammed with dividend-paying faves such as GlaxoSmithKline (LSE: GSK), AstraZeneca (LSE: AZN), BG Group (LSE: BG), British American Tobacco (LSE: BATS), Vodafone (LSE: VOD), Tesco (LSE: TSCO), National Grid (LSE: NG), Imperial Tobacco Group (LSE: IMT) and BT Group (LSE: BT-A). 

It is almost impossible to produce a more solid blue-chip line-up than that, yet Woodford underperformed the wider market by around 20% in 2009. So where did it all go wrong?

No boom = no bust

Well, the dash for trash didn't help. Woodford doesn't do trash, he does value, which is a different thing. Also, 2009 was a crazy investment year, and Woodford isn't crazy. 

He was sober enough to avoid the even crazier dot.com boom, a rare example of independent thinking among fund managers, even though it put his reputation and job on the line. Last year's underperformance could be a good reason to invest in his fund at the moment, because 2010 is shaping up to be very different to last year.

Top fund manager, going cheap

Woodford has been cautious in recent months, arguing that the economy faces a rocky three or four years, and is now focusing on defensive sectors such as pharmaceuticals, tobacco, utilities, telecoms and aerospace and defence, where he senses value. He says companies in the sectors offer resilient earnings, enduring business models and sustainable dividend growth, something that isn't reflected in their share prices.

He also likes the fact that many of these businesses earn a significant part of their income overseas, which means his funds shouldn't become too reliant on the UK.

Crucially, he believes last year's winners are now overvalued, and will struggle to deliver their projected earnings growth. All of which seems pretty inarguable to me.

If you accept this line of thinking, now could be a good time to buy units in Woodford while he's going cheap. You will also get a yield of around 4%.

See Woodford for the trees

RosiesDad also asked how Woodford's funds are likely to perform against their peers in 2010. First, I would say that is too short a time-frame, even a dart-throwing monkey can have a good year, and proven fund managers are allowed the odd bad one. 

Over the last 10 years, Woodford outperformed his peer group nine times, according to figures from Trustnet.com. I think we can forgive him that single bad year, especially since his funds grew 160% over that period, against just 70% for his peer group.

And he's got a smart haircut too

That doesn't mean he is the only manager worth considering in this sector, which has always attracted plenty of heavy hitters, including Carl Stick at Rathbone Income, Bill Mott at PSigma Income, or James Henderson, manager of investment trust Lowland Investment Company (LSE: LWI).

If you are heavily invested in this sector, I would recommend splitting your money between different fund managers, to benefit from their good years and offset their bad ones.

I've never met Neil Woodford, but I'm looking at his picture now, with his solid jaw and cropped hair, and he looks like a bloke you would like to have alongside you in a scrap. That's what I like to see in a man guarding 5% of my money.

More from Harvey Jones:

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

MunroMan 17 Feb 2010 , 4:34pm

Journalists insist on comparing Woodford's performance to the FT All Share Index when up to 20% of his funds are held in securities that are held outside that Index.

Can you imagine a Formula 1 team beating all its competitors and saying "But we obeyed 80% of the rules".

Don't just look at the outcomes, analyse the inputs as well.

Esquilax100 17 Feb 2010 , 9:29pm

Harvey, interesting article.

Re LordEssex's comment about buying outside the benchmark index, I have written on that in the past:

"It's no more illogical to differentiate a portfolio from the index by buying outside it than by not buying all of it; the risks and returns from either strategy can be dramatically different from those of the benchmark index."


- Padraig

NorthAthenian 18 Feb 2010 , 9:10am

Surely it is important to remember that these are income funds and that many people, including myself, invest in them for post-retirement income. The key issues to me are the stability of the income stream and its ability at least to keep pace with inflation. Total return, and by implication capital growth, are of lesser importance, especially over short time frames.

discokinged 18 Feb 2010 , 12:15pm

Hi Harvey,

I'd just add one more point in Woodford's favour. Not only has his long-term performance been good, not only did he avoid the tech crash in 2000, he also steered clear of banks in 2007/8 prior to the financial collapse.

So I'm happy to forgive him a poor 2009 and I'll carry on holding my investment in one of his funds.



BarrenFluffit 18 Feb 2010 , 12:27pm

How much influence can one man have on the investment expertise where they're running multiple funds, finite number of hours in the day. Reputations can get hollowed out.

Broomtree54 18 Feb 2010 , 2:19pm

Hey 11% in a bad year will do me thank you very much! These are income funds and that seems to be forgotten

I will be watching his call on oil [i.e. he got out of BP and Shell] with much interest but so far it looks like he might have caught a trend early and it is looking good

MunroMan 18 Feb 2010 , 4:26pm

He did steer clear of the banks but his fund went down just as much as everyone else's.

Don't forget too that his Income fund cut the dividend by 4.2% last October.

He is an excellent fund manager, and he is also human. Why does he think he knows oil prices are going to fall when we are already in the worst recession for 50 years and the UN says we are facing an energy crisis?

Dozey1 18 Feb 2010 , 6:35pm

I didn't see any indication of costs involved in buying into this fund, though perhaps that is no different to most adverts that omit the small print. This article was an advert wasn't it?

These funds are for fools and not Fools. Remember past performance is no guide to future performance, is it?


westwinds3 21 Feb 2010 , 4:36pm

One of the problems with most "Income" funds is that the majority of the expenses are deducted from capital rather than income. So that you appear to have a decent income from a portfolio of sensible shares, but all the time the expenses are nibbling away at your investment.
With investment trusts, most of the interest payments are also deducted from capital. It would be an interesting exercise to ask how many investment trusts have gained from gearing over the last 10 years.

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