Neil Woodford is one of the UK’s best-known portfolio managers. And his £6.1bn flagship product, the Woodford Equity Income fund, is one of the most popular funds among UK investors.
It’s no secret that Woodford’s performance over the last two-to-three years has been poor. Successful investing is as much about avoiding big losses as it is about generating big gains, yet in Woodford’s case, the portfolio manager has experienced one investing disaster after another. Provident Financial, Capita, Prothena, AA, Eve Sleep… the list goes on.
Bottom of the pile
So just how bad has Woodford’s performance been relative to his peers? I won’t sugarcoat this – it’s been bad. Really bad.
Analysing the performance figures of all the equity funds in the ‘UK All Companies’ sector available through investment platform Hargreaves Lansdown, Woodford’s Equity Income fund is the worst-performing one out of the 286 funds listed, over a one-year investment horizon, with a return of a poor -9.6%.
And it gets worse. Of the 261 UK All Companies equity funds on Hargreaves Lansdown with a three-year performance track record, Woodford’s Equity Income is the worst performer there too. There’s no denying that Woodford’s performance has been truly terrible. And this has been so for a while now.
Some of the best-performing funds in this sector have generated returns of 70% or higher over the last three years. For example, the Chelverton UK Equity Growth fund has returned 76% in just three years. CFP SDL UK Buffettology has returned 69% in just 36 months. And Nick Train’s UK Equity fund has returned 49% in this time. Clearly, Woodford is far behind his peers. So what should investors do?
Understand Woodford’s investment style
The first thing to understand about mutual fund investing is that almost all portfolio managers experience periods of underperformance at some stage throughout their careers. So Woodford’s recent woes, while incredibly frustrating, are not necessarily a reason to panic. The portfolio manager may be able to turn things around.
Having said that, it’s also important that investors understand his investment style. Woodford’s Equity Income fund is not an ‘orthodox’ operation. In fact, it was recently booted out of the equity income fund sector because its dividend yield was too low.
Whereas most equity income funds tend to focus on stable, large-cap dividend-paying companies, much of Woodford’s portfolio is invested in smaller companies that don’t pay dividends. This is a certainly a more unique investment management approach and one that is riskier too, given the number of smaller companies in the portfolio. A portfolio like this will often perform differently to the market in general.
Whether you stick with Woodford going forward is up to you. My advice is to take a closer look at the portfolio manager’s investment strategy, determine whether you’re comfortable with his approach, and then make a rational decision as to whether you believe he can turn things around. There are plenty of other good funds to invest in if you’re looking to diversify your capital.