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The secret to Neil Woodford’s success isn’t so secret

Image: Woodford Funds. Fair use.

Neil Woodford is often touted as the UK’s top stock picker, an accolade that’s helped make the funds he manages some of the most popular in the UK. 

Over the 26 years to 2014, from when Neil Woodford took the helm of the Invesco Perpetual High Income fund to when he stepped down to start his own business, the manager produced an average annual return for investors of around 13%. Considering the average investor fails to achieve an average annual return of 4%, this double-digit return is extremely impressive. 

But Woodford’s secret isn’t as secret as you might expect. The fund manager is well known for his love of income, and unlike other fund managers who tend to ‘closet index’ by building funds closely resembling the index they’re trying to outperform, to minimise the chances of underperforming, Woodford has never been afraid to follow his own ideas. 

And his belief in his own ideas is why he’s been able to outperform for more than two decades. 

A different strategy

As noted above, income stocks have always featured heavily in his portfolio. These stocks have given him a strong portfolio core. This core has given him scope to invest in smaller companies, companies that might turn out to be multi-baggers but are still in their early stages of growth. 

When combined with high-quality income stocks, this growth strategy has produced a power return for investors. 

Learning from the strategy 

Investors can learn a lot from Woodford’s strategy. Having some core portfolio holdings gives you room to experiment in the rest of your portfolio, improving returns but at the same time minimising risk. The larger holdings should be able to take care of themselves, allowing you more time to research smaller investments and keep an eye on them. 

Woodford has spoken before about the kind of core holdings he’s looking for. In an interview last year, he revealed that when assessing companies he starts with a basic calculation for judging a firm’s appeal, saying: “In very simple terms, our total return expectation for a stock equals its dividend yield plus the anticipated rate of dividend growth.” Even for the investor with minimal time on their hands, this is an easy strategy to follow. 

Once the core portfolio of high dividend stocks is in place, you can start building out the high growth opportunities. These opportunities will require more work than the dividend stocks. Small-cap investing is a tricky business and one that requires plenty of research and time, but with the core portfolio in place, you can rest safe in the knowledge that you won’t lose everything overnight if you make the wrong pick. 

The bottom line 

All in all, the secret to Neil Woodford’s success isn’t that secret. His strategy to beat the market is relatively easy to copy by building a core portfolio of high dividend stocks surrounded by growth shares. 

Looking for growth stocks? 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.