Earlier this week, subprime lender Provident Financial shocked the market when it announced that due to a mismanaged restructuring, losses in its doorstep lending business had ballooned to between £80m and £120m. To add insult to injury, the company also announced that its Vanquis Bank credit card business was being investigated by the FCA. To build liquidity to cushion losses and meet any fines stemming from the investigation, the company eliminated its dividend payout.
Star fund manager Neil Woodford is one of the largest investors in the financial services firm. At the end of July, his Income Focus and Equity Income funds had holdings equivalent to 3.4% and 4.1% of assets under management respectively. In both funds, Provident was a top 10 holding.
With shares in Provident down by around two-thirds over the past week, his funds have almost certainly been walloped by the company’s demise. However, despite this slip-up, I believe Woodford’s income offering still looks attractive.
Reassuring investors
Neil Woodford has issued a statement on Provident’s troubles to try and reassure his investors. It’s reported that Provident’s crash cost his investors as much as £326m extending losses on the popular Equity Income fund, which has lost a reported 2.6% of savers’ money over the last year.
According to the statement, management reassured him only a few weeks ago that the company’s problems were not as severe as they eventually turned out to be. As a result, he is “hugely disappointed by what has happened to the consumer credit division,” but with the rest of the company performing well, and a strong reputation among borrowers, he believes that Provident will eventually “get back on track.“
The funds still look attractive
Whether the subprime lender will be able to recover remains to be seen, but this scenario shouldn’t put you off Woodford’s funds.
In the past 12 months, quite a few of his stock picks have struggled, which has dented performance. Nonetheless, equity investing is a cyclical game, and we need to consider the long term investment returns of this star fund manager, not just short-term market fluctuations.
Indeed, even though the Equity Income fund has underperformed the FTSE All Share by 9.4% over the past year, since launch in 2014 the fund has outperformed by 10%. Over the 25 years before the launch of the new fund, he returned 13.4% per annum, as compared to a return of around 10% per annum for the FTSE All Share over the same period.
It’s Woodford’s long-term performance that leads me to believe his recent struggles are not a reason to sell. His favourite investments are income stocks, which have fallen out of favour over the last few months despite wider market gains. This divergence has resulted in underperformance.
It’s not possible to tell when this trend will reverse. The next bear market could be just around the corner, and when it does happen, safe income stocks will likely outperform, and Neil Woodford’s returns will pick up.
The bottom line
So overall, while his funds might have sailed into stormy waters this year, I believe that his offerings are still an attractive buy for the long term. In down markets, you can’t go wrong with safe dividend stocks, and no one can pick dividend stocks better than Neil Woodford, as his record shows.
