Remember Neil Woodford? He’s the fund manager whose stock-picking reputation did a ‘Grand Old Duke of York’.
First, he marched to the top of the hill to become arguably the most praised and admired UK fund manager. But then he marched right down again to become maybe the most criticised.
A common problem
In hindsight, the main reason for the latter poor performance of his funds appears to be his change of investment strategy. It’s such a common problem in the investment community that it’s earned a nickname: style drift.
And I’ve lost count of how many times my style has drifted over the years. I’ve also done a good many grand-old-Duke-of-Yorks, particularly by watching once-winning investments turn into losing investments while continuing to hold them. And as I write this, my previous inaction seems so stupid!
In the future, I expect to fall flat on my face many times more in life. So I’m not criticising Woodford for following his convictions. It didn’t work out as he planned and expected. But he had the courage to follow his heart. And now he’s reaping the consequences of his decisions, just as we all must, whether positive or negative.
However, the Woodford affair does emphasise how we must all take responsibility for our investments and follow them carefully. For me, that means sometimes bailing out of a losing position before the damage becomes too great for my portfolio. And that includes managed funds, if necessary.
Woodford was once great
But the main lesson I’ve drawn from Woodford’s career is that his earlier strategy worked well. And that involved buying mostly FTSE 100 shares and stocks with large market capitalisations when they were out of favour and showing low-looking valuations. It also involved avoiding entire sectors when he saw trouble ahead. And those two levers often led him to sell out after shares had risen a long way, thus locking profits into his funds.
His value investing wasn’t as dramatic as the likes of Benjamin Graham’s and Warren Buffett’s around the middle of the 20th century. Back then, they searched for a final ‘puff’ from deep-value ‘cigar-butt’ investments. And they’d often turn positions around in a shorter time frame than Woodford’s.
However, US fund manager Peter Lynch ran part of his strategy in a similar way as Woodford’s earlier approach. So it was a proven technique, given all that success.
FTSE 100 shares I’d buy now
And right now, I think there are several UK big-cap stocks with decent-looking quality and value characteristics that I’d consider buying for my ISA. For example, British American Tobacco and Imperial Brands in the out-of-favour tobacco and smoking products sector. And GlaxoSmithKline in the pharmaceutical sector, which has improving growth prospects although the stock price has been weak.
However, there’s no guarantee these shares will perform well in the years ahead. Much depends on continued momentum in their underlying businesses. Nevertheless, I’d be inclined to embrace the risks and add them to my diversified portfolio now.
