2017 turned out to be another torrid year for star fund manager Neil Woodford. His flagship £8.2bn Woodford Equity Income fund returned 0.53% in the 2017 calendar year, compared with over 11% for the average fund in the IA UK Equity Income sector.
This poor performance has weighed on investor sentiment, and for December, outflows from the fund reached £330m following £247m of outflows the previous month.
According to fund data provider Morningstar, these outflows now mean that the assets managed by the fund have fallen by nearly £2bn from a peak of £10bn in March 2017. During the year Woodford also lost the support of Jupiter Asset Management and insurer Aviva, which together pulled a total of £330m.
Look to the long term
Woodford has often complained about the short-term horizon most investors have, and I feel that short-termism is part of the reason why investors have been avoiding his funds. Indeed, he has always been a long-term investor, prioritising income and capital preservation over rapid growth. In bull markets, this approach loses out to growth investing, but over the full market cycle, such a defensive, value-oriented approach should yield results.
The biggest problem with this approach also happens to be its primary strength. Value and income strategies tend to underperform in bull markets but succeed when the market falls. The problem is, no one knows when the market will turn, so you have to suffer a period of underperformance to get the best long-term results.
To put it another way, Woodford’s returns should not be judged over a period of two, three or five years. Instead, investors should look to the long term, and here the manager has smashed the market. During his time at Invesco Perpetual (25 years to 2013), he returned over 14% per annum for investors and then, after setting out on his own, the Equity Income Fund returned 39% between mid-2014 and mid-2017.
Still, these returns have not been enough for some who believe that they can find better short-term gains elsewhere, and they’re not prepared to wait for a turnaround.
Will the market crash this year?
For his part, Woodford remains convinced that the market will slump, and his cautious strategy will pay off this year. By investing in domestic UK business, he believes the fund is insulated from instability in the global economy, particularly unsustainable credit growth in China and any market turbulence that might be caused by the ending of quantitative easing in 2018.
I feel that Woodford is on the right track here. 2018 is the first year since 2008 when central banks around the world will withdraw liquidity from the global financial system, and no one knows what reaction this will cause.
When uncertainty prevails, slow and steady income stocks, like the ones that feature heavily in Woodford’s portfolio, are the best choice as you never know what could be lurking just around the corner.
