As an active, pragmatic fund manager with a flexible investment mandate, it isn’t unusual for Neil to evolve his portfolios over time, as the valuation opportunity set constantly changes.
In recent months, our Woodford Equity Income Fund roundups have revealed a series of disposals of blue-chip companies, which have led to a gradual reduction in the fund’s exposure to the FTSE 100. When we launched the fund in June 2014, 57.7% of its assets were invested in FTSE 100 stocks. Over time, this exposure has reduced to stand at 46.5% as at the end of August 2016. Meanwhile, the fund’s exposure to FTSE 250 stocks, Aim-listed companies and unquoted opportunities has slowly increased. In other words, the fund has gradually moved down the market capitalisation spectrum as the opportunity set has evolved.
Our investment approach always represents a relentless pursuit of long-term valuation anomalies. The investment disciplines that we deploy in this pursuit are consistent: a strong macroeconomic view informing high-conviction, valuation-based stock-picking, coupled with a strong focus on absolute risk and long-term fundamentals. Over time, however, these same investment disciplines have resulted in drastically different portfolios. Neil has utilised the full flexibility of his investment mandates to build distinct strategies to suit varying market conditions and, most of the time, portfolios that look nothing like the UK market as a whole. After all, as Sir John Templeton famously once said, “It is impossible to produce superior performance unless you do something different from the majority”.
Let’s travel back through history to see how Neil’s portfolios have evolved over time. The first real example of Neil building a portfolio that looked (and ultimately behaved) very different from the broader UK market was in the early 1990s. His portfolios then bear very little resemblance to the portfolios he manages now. At that time, Neil had positioned his portfolios full of domestic cyclical businesses, primarily engineering and export-focused stocks but also retailers, leisure companies and real estate.
At the time, these stocks were incredibly cheap and getting cheaper. After a prolonged period of consumption-led growth in the “Lawson Boom” years, the UK economy had ground to a halt. The government of the time should have been pursuing policies to revive it but instead it made things worse. The Conservative administration, led by John Major, was intent on maintaining the UK’s membership of the European Exchange Rate Mechanism (ERM), a preparatory fore-runner of the region’s single currency, the euro. As a ‘semi-pegged’ exchange rate system, all member states of the ERM had to pursue policies that would keep their currencies tied in a tight band to the deutschmark.
We often talk about exploiting market irrationality in our portfolios but this was really an example of exploiting political irrationality – trying to maintain Britain’s membership of the ERM with the UK economy gripped by recession was the economics of the madhouse. Essentially, government policy was defying economic wisdom by raising interest rates (and using FX reserves) to boost the value of sterling, when the UK economy was screaming out for much lower interest rates.
George Soros became famous as “the man that broke the Bank of England” but essentially, Neil was shaping his portfolios to benefit from the same outcome – both of them developed high conviction views that the UK government would fail in its attempt to maintain Britain’s membership of the ERM. Neither knew how or when but both recognised the situation as unsustainable. In September 1992, on Black Wednesday, the UK withdraw from the ERM, and an immediate reduction in interest rates followed, along with a dramatic rally in the share prices of all things cyclical on the UK stock market. The funds that Neil was managing at the time leapt from the bottom of the fourth quartile to the top of the first quartile and stayed there for some time.
Today, we live in a different world – a very different economic environment and a very different valuation opportunity set. There have been various shades of portfolio in between, of course – be it a substantial weighting towards banks (yes, you did read that correctly) in the mid-nineties, or the ‘old economy’ stocks that were totally out-of-favour during the dotcom bubble, or the focus on global dependable growth that developed in the run-up to the financial crisis.
All of these portfolios were formed using the same tools and with the same aim – that of delivering attractively positive long-term returns to investors. In each case, they ultimately succeeded in that aim.
The equity income fund has evolved in the relatively short period since its launch but it continues to reflect the cautious view we have of the global economic outlook. We remain absent from the parts of the market that look most vulnerable to the economic headwinds and have focused the portfolio towards companies that can deliver sustainable growth in spite of them. Some of the larger cap businesses that have exited the portfolio still look capable of delivering growth but other opportunities, some of them in smaller, earlier-stage businesses, have surpassed them in terms of attractiveness and conviction.
This evolution will inevitably continue. The pace and direction of that change is impossible to predict, as it will depend on what happens in markets and in the global economy. One thing we can be sure of, however, is that Neil will continue to invest with the same discipline and with the same aim of delivering the attractive long-term total return that investors expect. An attractive, sustainable and growing income stream will continue to be a vital part of that return.
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Well done Neil!
Hi team.
Interesting article.
I think healthcare is a very wise sector to be in.
Simply because its always needed and always needs new things.
Keep up the good work.
Great team
It’s time to take control from shorts in regards with Northwest Bio therapeutics Inc, (symbol: NWBO) as its DCVax-L P3 trial is close to major revelation and multiple P2 trials involving multiple types of cancers are in last preparation and finalization for partnerships and launches in multiple sites.
Personally, I have increased my holding from merely 50k to today’s 360K, taking the advantage of unprecedented short attacks (Mr. Smith call them a wolfpack), ie, unbelievably low share price.
I agree ARH, but I have to believe Neil is under an NDA with NWBO and cannot buy until information becomes public. It’s pretty evident he could in fact gain control and drive the price up since the chart has turned back into the favor of the longs just recently. Plus, there are a lot of shares outstanding but not a lot of float. Most shares are tied up. Clearly the stock is being controlled by market makers/funds. If Cofer Black is doing his duties, the chart should finally continue to look good for longs. It has been a long road but should be quite worthwhile, in my opinion. Good luck!
I THINK THIS IS VERY GOOD LONG TERM STRATEGY PROVEN AND SUCCESSFUL.
THERE ARE TWO INVESTMENTS WHICH LOOK RATHER STRANGE AT THE MOMENT.
1) IS Northwest Biotherapeutics WHICH HAD AN INVESTIGATION TRIGGERED BY NEIL INTO ITS WORKINGS LAST YEAR. I SEE TODAYS PRICE IS 41CENTS WHICH 0.20% OF THE CAPITAL FUND.
IT IS NOT CLEAR WHETHER THIS IS THE RUMP AND THE MAJORITY HAS BEEN DISPOSED OF OR THE HOLDING HAS REDUCES BECAUSE OF THE SHARE PRICE. CAN WE HAVE ANSWER PLEASE? ()I THINK INVESTORS HAVE ALREADY PRICED THIS INVESTMENT INTO THE SHARE PRICE!)
2) PURPLE BRICKS. LATELY THERE HAS BEEN RATHER QUESTIONABLE PRESS REPORTS ON HE INFORMATION COMING OUT OF THIS COMPANY.
IT IS PUTTING OUT NUMBERS OF NEW LISTINGS OF PROPERTIES BUT NOT THE NUMBER OF SALES. COULD WE HAVE SALES FIGURES FOR THISCOMPANY.
IT IS 35% UPON ITS LAUNCH PRICE AND CLAIMS TO BE THE 4TH BIGGEST ESTATE AGENT IN THE COUNTRY. HOWEVER LOOKING NIGHTLY AT MY TELEVISION THERE SEEMS TO BE ADS ALMOST DAILY FOR COMPETITORS WITH THE SAME MODEL OF ONLINE AND LOCAL AGENT AT A VERY COMPETITIVE PRICE! IS IT TIME TO UNLOAD SOME OF THE HOLDING?
I DO NOT RECALL ANY ANNOUNCEMENT BEING MADE ABOUT THE RESULT OF THE INVESTIGATION.
I have heard that some of the company ‘agents’ list at any price to ‘get the instruction’ . I understand that is how the free lance valuers in the field are rewarded.
Hi Charles,
Regarding Purplebricks, we remain very happy with our exposure, believing it to be very capable of delivering continued rapid growth as it significantly disrupts the UK estate agency market.
We have neither bought nor sold shares in Northwest Biotherapeutics since October last year.
Kind regards
Mitch
Mitch,
While I suspect you are sick of NWBO questions from the US, I hope you can clear up one small point. Is Woodford & Co restricted from trading by NDA (non-disclosure agreement) or any other means, or have you simply chosen not to trade?
Regards,
Jerry
Hi Jerry,
We haven’t signed anything that precludes us from trading. Hope this clarifies your point.
Mitch
Being that Woodford & Co. owns more than 10% of NWBO and therefore qualifies as an insider, is it in possession of any material and/or non-public information that “precludes” Woodford & Co. from trading? An answer to this question would help to “clarify” the matter.
Hi Terrell,
You are correct that shareholders holding more than 10% of a company’s stock are considered statutory insiders, but there is an exemption for qualified institutional investors. As a non-US equivalent of a US registered investment adviser, we qualify for this exemption and are therefore not precluded from trading on that basis.
Regardless of whether we are considered to be statutory insiders or not, sometimes, in the course of our interactions with individual companies, we come to possess insider information which prohibits us from trading in the shares of that company until that information becomes public. We do not reveal whether or not we are ‘insiders’ in this way on any position, for reasons of market sensitivity.
As our previous response confirmed, however, we can confirm that we have not signed anything that prevents us from trading.
Kind regards
Mitch
Clarification would be excellent
I can’t help but think that the economy and the worlds leading economies as a whoel are due a correction of some sort. It seems things are out of sync with incomes of the working majority. No doubt an interest rate rise that can not be too far away over the horizon in both America and the UK will cause panic amongst investors. Not sure why though as we know its coming, its just a case of when?
From this blog it seems the management are starting to prepare for this through its continues cautious approach
Thanks for an excellent insight into the funds development.
Can you update us with the funds’ share turn-over statistic for this month.
In December you stated the share turn-over was 16%, with annual transaction taxes of 0.03%.
This month the annual transaction fees are at 0.05%.
I was wondering if there was a correlation the between share turn-over statistic and transaction fees.
Hi John,
There should indeed be a correlation between turnover and transaction costs – that’s one of the many reasons it is sensible to take a long term view. As we have mentioned in the roundups, in the post-referendum market mayhem, we did go through “a period of more rapid activity than is normally the case”. It’s still a long-term approach, but turnover has increased modestly in recent months – in the year to 31 August 2016, turnover on the Woodford Equity Income Fund was 22.5%. Nevertheless, the main reason for the increase in the transaction taxes that you refer to is the dilution adjustment. We do encounter transaction taxes such as Stamp Duty, but where portfolio activity is the result of inflows, new investors bear the cost of this tax through a dilution adjustment at the point of purchase. There was more of a dilution adjustment to offset these transaction taxes in the year ended December 2015, than there was in the year ended August 2016.
Kind regards
Mitch
To quote the stats you have produced: December 2015 the fund appeared to be experiencing large net inflows had a spread of 0.02% and transaction charge of 0.03%; the charges for August 2016 when the fund appears to experience smaller net inflows the spread was 0.06% and transaction 0.05%.
Is the dilution adjustment you talk about the spread statistic you produce?
With small in flows how would these charges effect the value of the fund?
Hi John,
There are some useful definitions to these terms in the blog post which introduced our efforts to be fully transparent on these fees: https://woodfordfunds.com/blog/further-fee-transparency/
The dilution adjustment is not the same as the spread, although the two are sometimes confused. The dilution adjustment attempts to ensure that inflows (and indeed outflows) do not effect the value of the fund – it is an estimate of the cost of trading activity related to flow and investors bear that cost at the point of their activity.
I hope this helps.
Kind regards
Mitch
It’s impossible to predict exactly what will happen but it is reassuring to know there are excellent brains working full-time trying to uncover value on our behalf. I have my own small portfolio in addition to a small investment in Neil and I spent some years enviously watching growth stocks shoot forward while my own cautious value buys stagnated but having witnessed the volatility of the UK market over the recent past I am now quite happy with my strategy. If you are acting on behalf of others then the strategy Neil adopts is the only one with integrity so IMHO you are on the right path.
Òut of interest, do you not put out the monthly fund updates anymore?
I was wondering, given the news out of Capita today, do you have any updates on the team’s view of the performance of this top 10 holding?
Hi David,
We have always accepted that there was some cyclicality in Capita’s business but nevertheless we are surprised and disappointed by yesterday’s update. A number of issues have arisen across the business which have resulted in this profit warning, some of which are one-off in nature. Having said that, we clearly need to get to the bottom of why these issues have occurred and, as you would expect, we intend to engage with management to get a better understanding of what is going on.
As is often the case in these situations, the market’s reaction has been disproportionate, however. There is never a good time to put this sort of news out but Capita’s share price fall yesterday should be viewed in the context of what is going on in the broader market. Following the OPEC meeting earlier this week, markets are now hoping for some form of supply constraint, which has led to a bounce in the oil price and in the wider commodity complex. The corollary of that has been indiscriminate selling of practically everything else. It is also the end of the quarter which, these days, always coincides with strange positioning behaviour. None of this should distract from what was a disappointing update from Capita yesterday, but it may well have amplified the market’s reaction.
Kind regards
Mitch
Thanks for the narrative – it does seem to confirm my view – what was it, a 10-11% drop in profit leads to a 34% correction in the price as of Friday! Are you able to share your views on the sustainability of their dividend, I think this will drop dividend cover to below 2x and I wonder if it will jeopardise their final dividend payment
Hi David,
No problem. We do not believe that the recent news from Capita endangers its dividend.
Kind regards
Mitch
I have invested in Neil’s funds since Invesco Perpetual days, and believed that it was wise to invest a modest sum in his WPC Fund in July 2015. Since that date the fund has lost 20%. ( as of today’s date). In the same period my other investments have grown by up to + 22%, including Buford Capital , + 18%, Worldwide Healthcare, etc.
Having turned 70, should I consider moving out of this ‘ patient’ fund?