Britain's version of Warren Buffett has mercilessly trounced other fund managers.
As any experienced investor will tell you, beating the stock market is easier said than done.
By taking on more risk, you can beat Mr Market for a few years, but then put in a terrible performance that wipes out most of your hard-won returns. For example, many investors ran up huge losses in 2008, a year when the FTSE 100 index crashed by more than 31%.
Hence, fund managers that consistently beat the market over a decade or two are as rare as hen's teeth, as almost all professional money managers hit the canvas eventually. I say 'almost' all, because there is one particular candidate who stands out as perhaps the best of thousands of money managers in the UK today.
It's not rocket science
This investing legend is, of course, Neil Woodford, the much-praised manager of two of the UK's very largest retail funds: Invesco Perpetual High Income and Invesco Perpetual Income. In these two funds alone, investors have entrusted Woodford with more than £20 billion of their hard-earned cash. Woodford has run both funds for two decades now, and has managed the Edinburgh Investment Trust (LSE: EDIN) since September 2008.
So what's his secret?
Woodford's special skill is remarkable simple: he has extraordinary patience and sticks to his knitting, buying bargain shares when others panic during the latest market meltdown. Hence, Woodford's commitment to investing in solid, well-run companies with predictable earnings and generous dividends has served him brilliantly since joining Perpetual in 1988.
Before joining Perpetual, Woodford graduated with a bachelor's degree in economics and agricultural economics from the University of Exeter in 1981, and his career took him through Dominion Insurance, TSB and Eagle Star. Born in 1960, Woodford is also one of the youngest 'all stars' in our Investment Greats series.
In 2000, when Perpetual was bought out by Amvescap (now Invesco), Woodford reportedly made £50 million on the deal, in addition to retention bonuses.
To show you how just how convincingly Woodford has beaten the market for years, take a look at the following table, which shows his investing returns over the five, 10 and 15 years to 31 December 2011, versus the FTSE All-Share index:
|Period||High Income Fund||Income Fund||FTSE All-Share|
(Source: Bloomberg. Figures include reinvested dividends)
As you can see, Woodford has absolutely thrashed the wider market over all three periods.
Over the past 15 years -- not a terribly favourable period for shares as a whole -- Woodford's two funds have produced returns of 347% and 335%. In other words, his happy investors beat the wider market by 305% and 293% respectively.
That's the kind of outperformance that creates loyal customers for life!
The comeback king
What's equally remarkable is the consistency with which Woodford has beaten his peers. Incredibly, he beat the market for nine years in a row, as both of his funds beat the FTSE All-Share every year from 2000 to 2008.
However, in the huge market rebound of 2009/10, Woodford's conservative, dividend-orientated funds didn't bounce back as strongly as the wider market did. While the FTSE All-Share leapt by 30% in 2009 and 15% in 2010, Woodford's funds climbed by between 10% and 11% a year.
Although his focus on value instead of growth may have held back his funds in those two years, Woodford's quality soon shone through. Indeed, his funds have since gone on to outdo the market during the turbulence of 2011 and early 2012. During 2011, for instance, Woodford made 12% for his investors, while the FTSE All-Share dipped by 3%.
In fact, Woodford doubly deserves this reputation as the 'comeback king', as his funds rarely underperform for long periods.
For example, his funds fell out of favour during the go-go years of the late Nineties, as the 'hot money' poured into racy dotcom funds. When growth funds ran up huge losses and left investors with burnt fingers, Woodford's funds slowly but surely showed their class by protecting and growing investors' capital over the next decade.
Show me the money
To recap, Woodford likes to invest our money in large, well-established businesses that generate plenty of cash and are committed to returning some of this to shareholders via decent dividends. All he aims to do is to capture the biggest share of this future dividend stream as he can for investors in his funds.
By sticking with income investing and not following the latest investment fad, Woodford has produced superior, consistent, long-term returns that other fund managers can only dream of. Also, by focusing on quality, defensive businesses, Woodford has avoided the high-risk end of the market where the biggest losers lurk. For example, he ditched financial shares long before the credit crunch of summer 2007 blew up our banks and led to huge, taxpayer-backed bailouts.
When he's wrong, Woodford isn't afraid to admit his mistakes, sell shares and move on. For example, he sold a large holding in supermarket leader Tesco (LSE: TSCO) after its first profit warning for 20 years.
Finally, Woodford has beaten the wider market by ploughing his own furrow and playing the long game, but which blue-chip companies is he keen on right now? To find out this and more, download our special report, 8 Shares Held By Britain's Super-Investor. It will give you yet more insight into the mind and methods of Britain's home-grown version of US investing legend Warren Buffett!
More investing greats:
John Bogle | George Soros | Ben Graham | Jim Rogers | Warren Buffett | Anthony Bolton | Jesse Livermore | Jim Slater | Charlie Munger | Peter Lynch | Carl Icahn | Philip Fisher | Ken Fisher | John Neff| John Templeton | Mark Mobius
Cliff does not own any of the shares or funds mentioned in this article. The Motley Fool owns Tesco.