Previously outperforming British fund manager Neil Woodford has been getting a bit of stick over the past couple of years because his funds have been underperforming. For example, his Equity Income Fund aims to “offer investors capital growth and a growing income stream.” However, its capital performance since inception in 2014 lags that of the FTSE All-Share Index and the fund’s dividend yield around 3.5% slightly lags the yield of the index, which runs close to 3.6%.
Better off in a tracker
If you account for the fees the fund will charge you, it seems clear that a simple, passive, low-cost index-tracking fund would have served you better over the period. Yet Neil Woodford has never been afraid to go against the crowd and is on record as saying that periods of underperformance are normal. He’s always bounced back before, and this time he seems to be employing the tactic of investing in what he sees as undervalued UK-facing cyclical firms to drive future performance.
He thinks that “unloved and undervalued” domestic companies are “are already pricing in an overly bleak scenario for the UK’s economic future.” In his September round-up mail, he said he is “convinced” that his funds operate “an appropriate strategy for the challenges that lie ahead.” Perhaps he’s right. Some of his investee companies are beginning to sprout up green shoots, such as Topps Tiles (LSE: TPT), which delivered a positive full-year trading update today and the shares rose more than 10%. There’s a chunk of the shares in the Woodford Income Focus Fund.
Profits moving up
The firm says it is the UK’s largest tile specialist and trades from 370 sites after a bit of nipping and tucking during the year. Two new stores were opened but six were closed, which suggests that the directors are cutting their losers. And most seasoned investors and traders know that’s the best way to score consistent positive returns overall. Indeed, the figures are encouraging. For the 52-week period to the end of September, the firm expects adjusted revenue to come in a little over 1.5% higher than the equivalent period last year. However, the like-for-like figure is flat, suggesting the business is at least holding its own despite the tough trading environment. There was a slight upturn in the final quarter with the like-for-like figure moving 1.2% higher.
The directors expect adjusted pre-tax profits for the period to come in “slightly ahead of the top end of the current range of market expectations.” My guess is that this positive statement is what excited the market today. But we are not out of the woods yet. Looking ahead, they said the “uncertainty in the UK economic outlook” is keeping them cautious.
After the well-reported string of plunging shares in his funds, Neil Woodford must be pleased to see this one going up. However, I’m still not persuaded that buying cyclical firms now is a good idea, and I’m not brave enough to pile into Topps Tiles for the time being.
