The housing market and top fund manager Neil Woodford have two things in common. First, both have generated plenty of wealth for ordinary Britons over the last three decades. Second, both have disappointed lately, particularly Woodford’s flagship fund.
Ups and downs
CF Woodford Equity Income has fallen 4.6% over the past 12 months, while the UK All Companies sector rose a healthy 6.8%. That is on top of a fall of 1.3% in the year before that. Its performance has been bad, very bad.
UK house prices have just suffered their biggest monthly drop in six years, falling 0.5% in August, according to Nationwide. However, unlike Woodford, they are still up 2% over 12 months. There is now a danger that both could start falling at the same time.
Building bust
House prices are being hit by stagnating wages, rising interest rates, Brexit uncertainty and affordability concerns. London is falling, and although parts of the Midlands, North and Scotland are still doing well, concerned investors have been dumping housebuilding stocks in droves.
This is a blow for Woodford, because he has surprisingly chunky exposure to the sector. His flagship fund’s second-biggest holding is Barratt Developments, which makes up a hefty 5.63% of his fund. Online estate agency Purplebricks makes up another 2.8%.
Property shock
Another stock, Taylor Wimpey, has just slipped outside of the top 10, although last time I looked it made up 2.71%. This means that around 10% of his fund is invested in just three stocks with full-on exposure to the residential housing market. Also in the top 10 is specialist listed real estate investment trust, NewRiver REIT, which focuses primarily on retail and leisure property and contributes another 2.74%. This is commercial rather than residential, but even so.
I was surprised by this exposure, I had never thought Neil Woodford was that into property. I will admit that I have been tempted by the sector as well, earlier this year I said prices may continue to be underpinned by supply shortages and pent-up demand. You can add low interest rates and government schemes such as Help to Buy to that list.
That’s going to hurt
However, when I look at the performance of these four property stocks, I shudder, because every single one has notched up double-digit losses. Barratt’s share price is down 12% in the last 12 months. Taylor Wimpey is down 14%. NewRiver REIT is down 24%, while Purplebricks has crashed by a whopping 36%. This is at a time when house prices are still rising. If prices start falling, things could get even uglier.
Others saw the danger coming. I have been looking at user comments on the Woodford Funds website and found this gem from a disgruntled former investor on 10 Sep 2017: “The housebuilder ramping was my signal to sell up…. he piles into housebuilders, land and brick companies at the peak of the economic cycle?… there is only one way for these companies to go, and that is down.” Ouch.
Perhaps this is another of Woodford’s famed contrarian plays. Would you like to bet on it, though?
