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Has it paid to follow star fund manager Neil Woodford?
Three years ago star fund manager Neil Woodford started his own fund manager venture and took with him an army of loyal followers.
During his 25-year stint at Invesco Perpetual Woodford turned a £1,000 investment into around £23,000 (to October 2013), comfortably outperforming rival managers and the wider stock market. As a result, when he left Invesco Perpetual the money followed him, both from financial advisers and from do-it-yourself investors.
Three years on, those who did continue to back Woodford haven't been disappointed. Number-crunching from Fund Calibre, a fund rating service, places CF Woodford Equity Income top of the Investment Association's (IA) UK Equity Income fund sector since launch, having notched up a return of 39% over the period from 2 June 2014 to 5 June 2017.
In returning 39%, Woodford has delivered on his promise of annualised high single-digit returns over a three- to five-year time period.
|CF Woodford Equity Income||38.9|
|MI Chelverton UK Equity Income||36.9|
|BlackRock UK Income||36.7|
|Man GLG UK Income||36.2|
|Troy Trojan Income||36|
|CF Milton UK Multi Cap Income||36|
|Franklin UK Equity Income||34.4|
|Royal London UK Equity Income||33.1|
|Rathbone Blue Chip Income & Growth||32.4|
Strong first year
Fund performance over the three-year period has been heavily influenced by a strong first year, however, with the fund returning 21% in its first 12 months.
Woodford has over the years made some astute sector calls, most famously avoiding technology stocks ahead of the dot-com bubble; in the first year of his new venture, one sector in particular helped the fund outperform - tobacco.
In addition, certain sectors that Woodford shies away from, such as oil, gas and mining companies, had a poor year between June 2014 and June 2015.
More recently, however - particularly in 2016 - resource stocks enjoyed a resurgence, with share prices spurred on by the slide in oil prices to a floor of $30 a barrel. As a result, over the course of 2016 CF Woodford Equity Income returned a meagre 3.2%, compared to an 8.8% average gain for the IA's UK equity income sector.
In addition, some of Woodford's stock bets turned sour. The portfolio backed and continues to be invested in Capita (CPI) and Next (NXT), which were two of the FTSE 100's (UKX) three worst-performing shares 2016. The companies saw their share prices decline by 60.5 and 33.2% respectively.
Overall, however, investors who have backed Woodford from the beginning can surely have no complaints, points out Fund Calibre's Darius McDermott.
"It is true that a good part of the outperformance came in the first year or so, while Woodford had a disappointing 2016. But it isn't unusual for a fund manager to have a period of time when things don't go as well, and the fund was still in positive territory," he says.
"Last year the big resources companies and banks - which Neil doesn't own - did much better, as the sectors bounced back. 2017 has so far been good again and I don't think long-term followers of Woodford will worry too much about shorter-term dips."
Adrian Lowcock, of Architas, the fund manager, agrees that three years on from setting up his eponymous business, Woodford has impressed.
"For me the interesting thing is that although Woodford is known for favouring sectors such as tobacco and pharmaceuticals, he has been able to protect the gains made even in unfavourable markets. His focus on income and income growth lends itself to this as well," says Lowcock.
Can Woodford continue to outperform?
Looking ahead, the big question now is whether Woodford can continue outperforming peers and the wider market. He is certainly more optimistic than most other fund managers are at this juncture. While others are wary about the prospects for the UK market going forward, given the FTSE 100 is trading at near record high levels, Woodford is in bullish mode.
Rather than worrying about how the various macroeconomic worries on the horizon, including Brexit, will pan out, Woodford argued earlier this year that he is seeing more value in the stock market today than he has done in a long time.
He said: "The stocks I like were in a bear market last year, so I am more bullish now than I have been for a while."
In addition Woodford also remarked that he has become more upbeat following last week's general election result.
"Theresa May does not have the mandate that she had hoped for - that, in my view, will mean that the new administration will embrace a looser fiscal strategy going forward - borrowing more and spending more," he says.
"Overall, this will be positive from the perspective of UK economic growth. I would also expect, for example, the cap on public sector pay to change, as part of this fiscally stimulative agenda."
He adds that if the Conservatives successfully form an alliance with the DUP, this should mean that the 'hard Brexit' outcome that the market has most feared becomes less likely. Membership of the EU customs union, an open border with Ireland and a softer Brexit are therefore on the horizon, while the risk of a second referendum on Scottish Independence appears to have diminished.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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