Could things go from bad to worse for Neil Woodford?

Could more underperformance be ahead for Neil Woodford?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

This year has been one to forget for Neil Woodford. His investment decision-making ability has been questioned by a wide range of investors after a poor performance by his standards. His funds have generally underperformed their benchmarks, and this has led to his reputation suffering at least some damage.

Looking ahead, his fund performance may deliver strong returns in the long run. However, in the short run things could realistically go from bad to worse.

Big calls

One of the major decisions made by Neil Woodford this year has been to sell stakes in long-held companies such as GlaxoSmithKline and British American Tobacco. At the same time, he has purchased a large stake in Lloyds which makes it the fifth biggest holding in his UK Equity Income fund.

While in the long run Lloyds could perform well and deliver high returns, the reality is that the UK economy faces a highly challenging period. Brexit has caused confidence to fall, which has helped to move inflation higher. With consumer spending likely to come under pressure due to falling real disposable incomes, the economic outlook for the UK seems tough. This could hurt the performance of banking stocks such as Lloyds. With the bank operating almost exclusively in the UK, its share price could come under pressure.

Although Lloyds makes up just 3.1% of Neil Woodford’s UK Equity Income fund, his decision to make it one of his top holdings could be scrutinised by investors. Should the bank’s share price fall in the short run, it may be viewed as another ‘error’ by the star fund manager.

Likewise, if Brexit negotiations continue to move along at a slow pace and the pound continues to weaken as the prospect of a ‘no deal’ builds, international stocks such as GlaxoSmithKline and British American Tobacco may see their share prices rise in the short run. Having sold them recently, this could be seen as a further mistake by Woodford.

Long-term potential

Of course, he has been in a similar position before. During the dotcom bubble he was viewed as being out of touch with a new growth avenue. He sat out the bubble and endured criticism for doing so – until it burst and suddenly he was back in fashion once more. Therefore, a similar journey may be ahead this time around.

Certainly, his short-term performance has been disappointing. But the reality is that no investment style, strategy or fund manager can constantly stay ahead of their benchmark. Sometimes one strategy is successful for a period, then events happen and change the market. This can mean what was successful last year is no longer a worthwhile strategy – as was the case regarding the dotcom bubble and subsequent crash.

While things may get worse before they get better for Neil Woodford, in the long run he could be proved right in his decisions. With his reputation being somewhat less impressive than it once was, now could be the perfect time to buy his funds for the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares in GlaxoSmithKline, British American Tobacco and Lloyds. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Start supercharging passive income with REITs!

Are REITs the ultimate investment for boosting income generated from a portfolio? Zaven Boyrazian explores some of the most lucrative…

Read more »

Investing Articles

Should I buy more Rolls-Royce shares near 500p?

This investor is wondering whether to buy more Rolls-Royce shares this summer or to just stick with those he already…

Read more »

Investing Articles

After its big fall, is the National Grid share price dirt cheap now?

The National Grid share price fell sharply in reponse to new rights issue plans. But is it an even better…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Starting in June, I’d invest £1,000 a month to aim for a £102,000 second income in retirement

This author highlights a less well-known FTSE 100 stock that could help his portfolio generate a very big second income…

Read more »

Investing Articles

Down 47% in 5 years, is the IAG share price due a bounce?

Many companies in the travel sector have seen fierce rallies since 2020. But with the IAG share price still down…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Despite its drop, I reckon this is one of the best FTSE 100 stocks to buy and hold!

The FTSE 100 has been climbing in 2024 but this favourite of our writer's has been falling. Despite this, she’s…

Read more »

Investing Articles

AI stocks vs EV shares; which is the best sector for me to invest in?

Jon Smith considers the recent rally in AI stocks and weighs up whether to allocate more money there versus EV…

Read more »

A graph made of neon tubes in a room
Investing Articles

Do Greggs shares have even more growth ahead?

Greggs shares have seen some solid growth in the last few months, as the economy shows positive signs. But is…

Read more »