Neil Woodford’s had a torrid time since leaving long-time employer Invesco Perpetual, and launching his own fund management business in 2014. After a promising first year, his flagship Equity Income fund has fallen into an extended period of under-performance and investor criticism. We saw such periods at Invesco, but there’s a big difference this time. Indeed, a difference that could potentially lead to the collapse of the House of Woodford.
Extremes
Past criticism of Woodford has generally been that he was being too conservative. He proved his critics wrong. He was right to avoid the dotcom mania of the late 1990s, and to steer clear of banks when they were stocks du jour in the years before the Great Financial Crisis. And he actually got in bother with the regulator at one time for holding too much cash in his funds.
The current situation is the complete opposite. He’s convinced the time is ripe to invest in businesses that have developed as a result of the decoding of the human genome at the turn of the century. Many of these — and others with a ‘disruptor’ theme he’s backed — are currently unlisted, loss-making, and require considerable further cash investment.
He’s embraced high-risk with a vengeance, not only with the nature of the stocks he’s backing, but also by gearing his bets to the tune of near £250m borrowings in his growth-focused Patient Capital investment trust, and even dipping into the red to support his core Equity Income fund.
Ecosystem
Early last year I reconsidered my position on Patient Capital, rating it a ‘sell’ on its increasingly high-risk profile. I maintain my stance today, because the trust has made further alterations to some of its self-imposed limits, all of which have upped the risk ante even higher.
Meanwhile, the poor performance of his Equity Income fund, after an inordinate number of disastrous stock picks, has led to a sustained outflow of disillusioned investors. He’s regularly had to reduce or sell some of the fund’s most liquid holdings — namely, his bigger (often dividend-paying) companies.
As a result, the Equity Income fund’s own dividend is in decline, and its weighting of riskier holdings (such as illiquid small-caps and unlisted companies, including indirectly via a stake in Patient Capital) is increasing … leading to more investors jumping ship.
Endgame
We’re looking at a vicious spiral that could potentially lead to the fund imploding, and a star manager downfall on a scale I’ve not seen before. Woodford desperately needs to stem the outflows from his Equity Income fund by improved performance. It might also help, if some of his unlisted holdings can get IPOs away, and he can raise cash from those.
However, continuing poor performance and redemptions would be disastrous, and the market appetite for IPOs isn’t always buoyant. If the Equity Income fund were to continue its current trajectory, broker Hargreaves Lansdown (which holds it in its house funds and has controversially retained it on its influential Wealth 50 list of recommended funds for its clients) would surely have to pull the plug to limit its own reputational damage.
Woodford could yet turn things around, and I hope for the sake of his loyal supporters he does. However, I don’t believe he should ever have put them in as precarious a position as he has done.
