Two years ago, Neil Woodford ruled supreme. His eponymous fund CF Woodford Equity Income had thrashed all comers in the year since launch in June 2014, returning a thumping 16.2% against just 5.3% across the UK Equity Income sector. Investor money duly flooded in.
In Neil we trust
When he launched Woodford Patient Capital Trust the following April it instantly attracted £500m, even though this was an entirely new venture for him, an investment trust focusing on early-stage companies. Then it started to go wrong.
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CF Woodford Equity Income’s second discrete performance year undermined the myth of invincibility, growing just 3.8% against 9.8% on its benchmark, according to Trustnet.com. In year three it fell 0.1%, while its benchmark grew a whopping 11.1%. No Superman, he.
If you thought that was ugly, cover your eyes. Woodford Patient Capital Trust fell 9.9% then 6.5% over its first two years, against growth of 3.7% and 18% on its benchmark, the All Companies index. He has also suffered embarrassing stock disasters: Provident Financial, AstraZeneca, Allied Minds, AA and in his investment trust, Sphere Medical Holdings. The cry went up: what’s going wrong with Woodford?
I have been scouring performance charts for signs of a recent comeback but over the last three months, CF Woodford Equity Income is down 2.4%, against a 3.2% rise on its benchmark.
He is responding as he always has when the cycle turns against him: by hunkering down, ignoring the hype, and trusting his judgement. He did it when he shunned the dotcom boom in the late 1990s and banking stocks before the financial crisis. Performance slipped, analysts became sniffy, investors baulked and history proved him right.
Today he says the economy is in a bubble again, and he is positioned to benefit when it “inevitably bursts”. He can see so many “lights flashing red” he is losing count, including Bitcoin’s surge, European junk bonds yielding less than US Treasuries, historically low volatility and triple-leveraged ETFs attracting gigantic inflows.
Woodford notes that during every bubble a subset of stocks is dumped as investors rush to catch the latest fashion. He is hoovering up these uncool stocks, of which AstraZeneca is a good example, and biding his time, saying this is “an opportunity to capture assets at incredibly depressed valuations, the likes of which I have only seen two or three times during my 30-year career.”
Trouble with bubbles
Woodford isn’t the only one worried about heady valuations. The US has only been this expensive three times before, in 1929, 1999 and 2007. Nor is he the only one to note that after recent underperformance the UK looks relatively cheap.
The problem with calling a correction is that you are trying to time the market, which is impossible. Bubbles typically blow for longer than people expect and with the IMF predicting strong economic growth next year, this one could carry on inflating. So 2018 could be another year of pain for Woodford. The cycle will one day swing his way, because cycles do. Neil Woodford could still make you amazingly rich, if you are patient.