Woodford doubles down on Brexit positioning in apology letter

The troubled equity manager will need liquidity to be contrarian


Neil Woodford has doubled down on his conviction in domestically-focused UK equities, but investors point out liquidity is required for fund managers to take contrarian bets.

In a letter to intermediaries outlining his vision for Equity Income once its suspension lifts, Woodford said his performance had been disappointing for some time.

“I realise this will be concerning and frustrating to you and I am deeply sorry for putting you in this situation and for the impact on your workload,” he said. The email, sent on Tuesday afternoon, also included a template of a letter intermediaries could forward to clients invested in Equity Income.

Woodford’s vision for Equity Income

The fund would be much more liquid but would retain its focus on undervalued companies exposed to the UK economy.

Woodford said: “The global economy is evidently slowing and this represents a considerable near-term challenge for equity markets. The UK is one of the few regional economies that has enough internal momentum to withstand the growing global headwinds.

“At the same time, many companies that generate most of their revenues from the UK economy are as cheap as I can ever remember.”

The shift away from unquoted and illiquid stocks to larger-cap companies would continue, he said. “That shift started in February and further carefully-managed activity is anticipated in the weeks and months ahead to execute the rest of this shift.”

Contrarians need liquidity

However, Woodford must manage fund flows alongside his conviction in the UK economy.

Willis Owen head of personal investing Adrian Lowcock said markets can stay irrational far longer than you (the investor) can stay solvent.

“I think this is the issue for Woodford and is always the issue for contrarian fund managers – even if you are right in the long run – is portfolio and investors nerves able to see you through it,” Lowcock said.

“You need liquidity to be contrarian.”

AJ Bell head of active portfolios Ryan Hughes reckoned a lot of value managers would currently be in the position of managing outflows and sticking by their out-of-favour bets. “But it’s much easier to do that when you’re in large cap rather than small cap.”

Investors turn elsewhere for pure value play

Woodford Equity Income had effectively introduced a barbell approach with large-cap value picks at one end and small-cap growth opportunities at the other, said Hughes.

But the repositioning outlined in his letter would be unlikely to aid performance in the immediate term, he said. “If he turns the fund into a large-cap value strategy, right now that style has got massive headwinds.”

Hughes said he was willing to stick by underperforming value managers when value is out of favour, but would prefer to gain that exposure through more pure plays on the style than Woodford Equity Income.

“Am I worried about Jupiter Special Situations at the moment? No, not at all. I fully expect when value comes into favour its very well placed to capitalise on that and I’d expect that to outperform.”

Income Focus merger?

Woodford is now turning the Equity Income fund into something that looks very much like Income Focus, said Hughes.

“That begs the question: what’s next? If the two funds are so similar then it may well be an option to merge the two together.”

Lowcock said if Woodford returns to “his true style” then the fund could recover in the long run.

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