“From time to time, markets become detached from valuation reality and while they are, fund managers like me appear to be incapable of delivering good outcomes. I appreciate that this can be an uncomfortable journey for investors but valuation is the only reliable predictor of long-term investment returns. I remain focused on capturing the opportunity that exists in parts of the market that have been left behind since we voted to leave the EU two and half years ago. The portfolios are populated with profoundly undervalued companies, many that are exposed to the UK economy. Crucially, the portfolios are positioned how I want them to be and are completely focused on a valuation opportunity, the likes of which I haven’t seen for more than 30 years.”
— Neil Woodford
Global equity markets continued to move higher in March, allowing the UK stock market to deliver its biggest quarterly total return in six years. Leadership of the UK stock market was, as has been the case for much of the last three years, dominated by the large, global dollar-earners, such as the oil majors, mining companies and consumer goods companies.
Data from across much of the global economy, has continued to disappoint expectations. The US economy in particular, now appears to be losing momentum, prompting the Federal Reserve (the Fed) to significantly loosen its policy stance. Previously the Fed’s guidance had suggested two more interest rate increases were likely this year, with quantitative tightening (QT – the process by which the Fed reverses years of quantitative easing by reducing the size of its balance sheet, thereby withdrawing dollar liquidity from the financial system) expected to continue throughout the year. Now, the next move in interest rates might be down and the pace of QT will slow from May and will conclude at the end of September.
As a result of the stock market rally so far this year, bond and equity markets are now telling us very different things about the economic outlook. The yield on many long-dated US Treasuries, for example, recently moved below that of shorter-dated bonds. This is known as an “inverted yield curve”, which is often seen as an early warning sign that more troubling economic conditions are on their way. It is hard to reconcile this price behaviour in bond markets with the more buoyant mood in equity markets. We have more sympathy with the view expressed by bond markets currently and are positioned accordingly.
We continue to focus the portfolios where there are more attractive economic fundamentals. The UK is one such place. During March, we saw better-than-expected economic data in many different parts of the UK economy, including industrial production, unemployment, wage growth and retail sales.
WPCT annual report
Today saw the release of the Woodford Patient Capital Trust’s annual report for 2018, which includes Neil’s review of the year.
With so much perceived uncertainty surrounding the UK economy, we want to provide you with the full context on what’s been driving the performance of the funds (and indeed the broader stock market) for the past few years and the opportunities we believe lie ahead.
Three-month UK employment change – the best level since late 2015
+0.2%
UK retail sales growth in February – consensus expectations were for a -0.4% contraction
$25.50
Price per share that Biogen is paying to acquire Nightstar Therapeutics – a 72% premium to its undisturbed share price
August 2007
Prior to March’s yield curve inversion, the last time the US three-month interest rate was higher than the 10-year rate – shortly before the financial crisis
-20.7%
Year-on-year decline in the dollar value of China exports
-0.8%
German industrial production down in January, versus expectations of a +0.5% increase
$2.6bn
Amount committed by Burford Capital to new investments over the last two years – more than twice the total amount it had committed in the previous seven years since formation
3.4%
Average growth in UK weekly earnings data in January, ahead of expectations (3.2%)
-8.7%
US housing starts in February, well below expectations – January revised down too
Our strategy remains focused on avoiding the considerable risks that have built up in equity markets over the last decade of QE-fuelled exuberance and capturing the opportunity that exists in the few parts of the market that have been left behind. For the funds, this results in portfolios that have a strong but selective bias towards profoundly undervalued companies that are exposed to the UK economy.
Elsewhere, the Woodford Equity Income Fund and Woodford Patient Capital Trust portfolios continue to be positioned to capture an exciting long-term opportunity across a range of earlier-stage businesses exposed to the themes of healthcare innovation and disruptive technology more broadly.
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Thanks for the update and analysis of the fund’s poor performance, which you have broken down and rationalised in the above analysis. As a customer I have a couple of thoughts: –
1) With your knowledge of the markets, your analysis and the way the market is behaving (momentum) could you not have protected your customers investment and the performance of the funds with a more balanced approach and taken advantage of some of the momentum activity to curb the losses? It seems that the fund is stuck in a dogmatic unyielding approach which is failing to give good returns.
2) 2 years ago, Brexit was 2 years away and as we have got closer it has become obvious that it will not be settled for sometime even if we leave, we will have some uncertainty for the UK after we leave so again surely you should have protected your customers investments with a more balanced approach and driven value from some of the momentum opportunities you clearly see in your day to day analysis.
3) In your analysis you do not analyse the effect on the funds’ performance due to the considerable redemptions from the fund by investors, neither do you reflect on the lost opportunity to the fund of the stocks that had to be sold to fund the redemptions surely this needs to be included.
So, I appreciate the analysis but wonder if just more of the same is going to drive returns for customers or do we have to wait it out, loose more money and hope for better returns. The better returns are going to have to be spectacular to allow the funds performance to catch up and overtake its peers.
The right approach would have been to have the courage of your convictions and protect your customers investments and the funds performance at the same time.
Hi Jon,
Thanks for the comment. The points you have made seem to be suggesting that Neil should abandon the disciplined investment principles that have served him and his investors so well throughout his long career, in order to deliver a more index-like performance over all time periods, and to avoid the risk of a prolonged period of under-performance.
This is something that he / we would not be prepared to do, because we wholeheartedly believe that it would not be in investors’ interests in the long run to do so.
To suggest that the “right approach would have been to have the courage of your convictions and protect your customers investments and the funds performance at the same time” is a contradiction, unless it is qualified with some form of time frame. A conviction investor like Neil cannot guarantee performance over any and every time period. A conviction investor can and should, however, stick to the principles of his / her investment discipline at all times, in order to build a portfolio that he / she believes will avoid a permanent loss of capital and deliver attractive long-term returns, based on the opportunity set that he / she sees ahead (even then, it is important to point out that there can be no guarantee of success – but we can at least point to a track record of prior success from the same approach, including occasional periods of under-performance that are similar to what we have recently endured).
That is what Neil has been doing – in fact, it is what Neil has always done, irrespective of whether his funds have been growing or shrinking in size. This disciplined investment approach has delivered exceptional long-term returns in the past, and we are very confident that it will deliver exceptional long-term returns going forward.
Admittedly, this approach has not delivered the outcomes we would have hoped for or expected over the last couple of years. We can understand why you and other investors are disappointed. But it would be absolutely the wrong thing to do, to react to this disappointing period of performance by abandoning our disciplined investment approach.
Kind regards
Mitch
Thanks for the update and analysis. With all the criticism Neil receives at the moment I admire the fact that Neil is sticking to his philosophy and investment approach. Neil’s professionalism and his ability to remain grounded gives me faith to trust him with my money. I hold two Woodford funds and will continue to drip feed money in for long term growth.
Hi Daniel,
Thanks for your comment and for your support. Investing without discipline is like sailing rudderless without a map. You might end up somewhere nice, but it is more likely to end in trouble, particularly when the seas get rough.
Kind regards
Mitch
It seems you have sold over 20% (6% of the equity) of your holding in NRR.It looks like Invesco bought this holding from you.Is this simply redemption related?.
Hi John,
This transaction should be seen in the context of maintaining the shape of the portfolio in an evolving market opportunity set. It does not represent a change of investment view.
Kind regards
Mitch
For investors on these pages concerned that they are (or have been) missing out on the market gains that momentum strategies have yielded for the best part of the last 10 years (i.e. during the ‘recovery’ phase of the financial crisis), it is probably important to note that a big reason for why these strategies have gone up, up and up was central bank intervention via quantitative easing that inflated financial asset prices. Momentum investing, especially those strategies employing a purely systematic style (i.e. that do not have any input from a fund manager but which completely allow algorithms to buy / sell based on market patterns) can be extremely risk – and one doesn’t need to go back too far to see this: just in the final quarter of last year, momentum funds have been absolutely battered. In fact, I don’t know of any momentum fund that has outperformed the market in Q4 of 2018 (i.e. during a time when you would hope that your money will do better than a falling market). The situation has become so complicated to navigate market patterns in a world in which financial markets’ gyrations seem to be dictated by the mood of the Fed that even Renaissance Technologies (one of the pioneers of [systematic] momentum investing) has cut back ‘sharply’ its use of strategies that bet on market patterns (see FT today). One reason for why these strategies haven’t worked in the market downturn is simply because momentum investing, by definition, believes that the past will continue, at least enough for the investor to make a return above cost – most strategies buy assets (let’s say stocks) that have been doing well for the past 6-12 months. In other words, most momentum investors were long (and quite a few of them also leveraged) the market right when the positioning (based on so, so many macro factors) supposed to be the opposite. It is almost impossible to call market tops, especially if you are basing your analysis on the past 6-12, even 24 months during which the market has only gone up – extrapolating the past can be dangerous and this is one of the main reasons why momentum can be extremely risky.
“During March, we saw better-than-expected economic data in many different parts of the UK economy, including industrial production, unemployment, wage growth and retail sales.” (Woodford)
This is from Chris Williamson, IHS Market:
“A drop in service sector activity indicates that UK GDP contracted in March, with the economy stalling over the first quarter as a whole and at risk of sliding into a deepening downturn in coming months. Both the services and construction sectors are now in decline and manufacturing is only expanding because of emergency stockpiling ahead of Brexit.
The underlying picture of demand is even worse than the headline numbers suggest. Service sector order books have contracted at the steepest rate since the height of the global financial crisis in 2009 so far this year, with companies reporting that Brexit uncertainty has dampened demand and led to cancelled or deferred spending, exacerbating a headwind from slower global economic growth.”
Why is this not mentioned in your update? Why don’t you give us the complete picture, not just a highly selective (and misleading) set of data to prove your investment case?
I would like to see more honesty and integrity from Woodford Management.
Dominik,
Some economic variables are more reliable than others. Some are forward looking, some are backward looking. Some are certainly more important than others, as a guide to what’s really happening. Consumer spending accounts for broadly 2/3 of the UK economy, so it is worth watching. The public finances are also a tangible guide to what is really happening in the economy, because they reflect real receipts from taxpayers. The labour market too is important, and it is undeniably strong at the moment. “More people in work, spending more money, leading to better tax receipts”. That is something we’ve been saying for some time now and, although it doesn’t fit neatly with the consensus view that the UK economy is a factory-closure away from recession, it is actually happening.
It is always possible to find data from somewhere which fits the narrative one wants to build but I genuinely do not believe that we are guilty of that here. We have consistently given you our view, based on what we believe to be the key drivers of the UK economy, where hard, reliable data is available. And we will continue to do that.
Kind regards
Mitch
11 April and no replies to some good questions. Communication is as poor as the trusts performance.
Apologies for the delay in responding to comments. Mitch is away from the office but we will respond as soon as we can.
Hello Dave
I have several funds and I don’t know any that have this type of communication where you can put your questions and get answers. So if Woodfords communication is poor what does that make all the other funds. As for the performance can’t really disagree there, but I’m happy to stick with them for the time being.
Hi David – thanks for pointing that out. Back now and on the case…
Kind regards
Mitch
I have never known a fund manager receive so much criticism in all my years of investing. It is unfair. Neil’s reading of the current situation is spot on. Stick with him and you will be well rewarded. Patience is needed.
Jeremy Boots
It is not unfair, its a reflection on the funds poor performance and failing to meet the objectives set out at launch.
If Neil’s reading of the situation is spot on then I feel it makes the current situation and the length of the poor performance more open to criticism, as the investment strategy of the fund could have been moderated to achieve half decent returns and stick to a long term strategy.
The level of communication is brilliant and Neil and his team have to be praised for openness and a willingness to communicate I wish all my other funds would do the same.
Thanks Jon and Miles.
I agree, Jeremy. I wonder if Warren Buffet got this much criticism during the years he underperformed the market (https://www.theatlas.com/charts/S1mAAANEz).
Thanks Jeremy – we are confident your support and patience will indeed be rewarded.
Kind regards
Mitch
Jeremy you are right regarding the patience for the patient capital fund it is what it says on the can, but the equity funds have missed some good opportunities, perhaps Mr Woodford should have been a bit cleverer and hedged some of his stock picks. He appears to have gone hell for leather in the hope of making massive gains but in doing so he has made possibly a penny share rookie error. I am down a few Bob in both funds and to be honest making the same mistake in not getting out with a stoploss. I despair.
Hi Dave,
Please see my response above, regarding conviction and investing with discipline. The concepts of hedging stock picks and stop losses are the anti-thesis of what disciplined, conviction investment is all about. Please do not despair. Here’s a quote from something Neil said a while back, which I believe represents wise words to bear in mind for any investment decision. “I believe it is critically important to maintain a disciplined, fundamentally-based perspective in my investment analysis. In all situations, it is vital that I do not let emotion influence my judgement.”
Regards
Mitch
Have reluctantly redeemed my holding today.Two years and 10% down.Enough is enough.
For what it is worth I have no faith in Purple Bricks whatsoever.Hope I am proved wrong for current investors.
The Card Factory outlets are forlorn looking places and the only plus is the decent dividend.
Is Mr Woodford too far removed from the nuts and bolts of stock picking and leaving some selecting to lesser mortals.You have to be ahead and head of the game to obtain any sort of return.
David
Sadly, I imagine that your post is reflective of how many others are thinking and acting. I agree with your comments about Card Factory and Purplebricks. Unfortunately, they are only two in a long list. Back in 2014, like many others I followed Neil Woodford on the new venture. I was confident based on Neil’s long track record and my own personal experience of investing with him.
First doubts arose with the NWBO situation. In spite of the WIM assurances that due diligence had been done on the governance of the organisation, I remained concerned that the excuse of the robustness of the product case had been relied on too heavily. In response, I transferred part of my holding to another fund. I checked this morning and the value of that transferred investment has risen by 111%.
Allied Minds followed. I read all of the available background at the time and, frankly, the short sellers’ case made more sense. Provident Financial then came along. Again, I was not satisfied by the WIM response and reduced my holding accordingly. Prothena just seemed to confirm the long list of failed binary bets. The investments I transferred at that time have grown by 60%.
Last year, as the EIF price dropped below £1.10, I sold the last of my holding in that fund. Like you, David, I did this with sadness but I simply had to protect myself. I split the funds across three investments, which have grown by 19%, 17% and 14% since then. Although I am disappointed not to have followed my instincts after the NWB debacle and sold out completely at that time, I am heartened by the fact that, if I had stayed wholly invested with WIM, there is no way, even if the projected shift towards “value” does occur, that the deficit can be made up.
I retain a small investment in the Patient Capital Trust because I have sympathy with its ethos but I have lost any real confidence that I will ever see my 20% loss improve. More worryingly, the lack posts each month and the more recent lack of responses from the team signals something fundamental about the future of the funds. Neil’s quote above is nothing short of nonsense from someone of his experience – “From time to time, markets become detached from valuation reality and while they are, fund managers like me appear to be incapable of delivering good outcomes.” Markets can’t become detached from reality – they are reality! Markets are not entities that can be wrong. Markets are simply a reflection of the decisions taken by millions of individual and institutional investors.
It is these statements and others in the media recently that give me real cause for concern for the future of the whole enterprise. With reference to the moderator’s comment on 12 April about Mitch being out of the office. I hope he is not unwell by, if so, my best wishes for a speedy recovery, both for him and the whole of WIM.
I fully understand why you did this and I wish I did this at the same time you did. I have been in the funds from the start, but now I’m getting ready to push the button myself. I agree on the stock picks and unless there is a turn around very soon both me and my wife will be pulling our funds out. The stock picks may have been cheap, but sometimes things are cheap for a good reason.
Hi David,
That is a shame but we respect your decision. We would like to reassure you though, that Neil is not at all removed from the stock picking process. Neil is responsible for all investment decisions across all mandates.
Regards
Mitch
Ray,
I am fine, by the way. It was just a holiday but I appreciate your good wishes.
I would just like to briefly reply to the point you have made about the quote on markets becoming detached from reality. I think I know what you are saying, in that what happens in financial markets is reality because it actually happens. That is why the quote reads “From time to time, markets become detached from valuation reality…”.
The point we are trying to make is that sometimes, what happens in financial markets does not reflect the reality of what is happening in the real world. Sometimes, this happens on a grand scale and, hence, you get asset price bubbles. Individual semper augustus tulip bulbs, for example, changing hands for more than the value of house. Or the Tokyo Imperial Palace becoming valued at a price equivalent to the entire state of California. Or Worldcom becoming worth more than Ford, Boeing and Merrill Lynch put together.
All of these things actually happened, but it is hard to argue that they bore any relation to valuation reality. And that is why these prices only persisted temporarily. As we have said before, we are concerned that this sort of valuation-insensitive behaviour has been increasingly evident in markets recently. It is, as you point out, the product of countless individual investment decisions. It is definitely easier to go with the herd than to go against it. But, we believe investors should be aware of the risks that have built up in markets as a result and tread carefully, because these are very dangerous market conditions.
Kind regards
Mitch
Anyone else buying Allied Minds? 😀