Neil Woodford’s explanation for why he has built up such large stake in small-cap companies has underwhelmed several people in the investment industry who say his rationale “does not bear close inspection”.
On Monday, Woodford fronted up in a video Q&A timed to coincide with confirmation from Link Fund Services that the fund would remain suspended for the next 28 days.
The beleaguered manager spent all of 20 seconds discussing why he has ended up owning, in some cases, between 20% and 30% of companies, including unquoted stocks.
“I was motivated to invest in undervalued assets and size those positions with a view to the investment opportunity, the extent of the undervaluation,” he explained in a video Q&A accompanying the fund update.
He added: “It’s fair to say in some cases the positions have become bigger because the stocks have performed very well.”
The fund’s authorised corporate director, Link Fund Solutions, said it would continue to monitor the situation on a daily basis and update investors further on the suspension on 29 July 2019.
Big stakes hampered liquidity
Seven Investment Manager senior portfolio manager Peter Sleep said the size of the stakes Woodford took in medium and small sized UK companies was ultimately responsible for the fund’s liquidity issues.
“The very size of these stakes rendered the shares illiquid and very difficult to sell at a robust price close to the market valuation. This situation was compounded by the large and concentrated nature of Woodford’s institutional investors who removed their money away from Woodford extremely quickly.”
Darius McDermott managing director of Chelsea Financial Services notes that Woodford’s strategy of owning big stakes in individual companies has been “a consistent part of his process” throughout his career. “It’s not something people can say Neil hasn’t done before.”
He agrees that while this approach worked when Woodford was running over £30bn across his mandates at Invesco and turnover was low, it came under pressure when he was running money out of a smaller boutique and poor performance led to increased outflows.
In order to meet redemptions Woodford was forced to sell his more liquid stocks, thereby increasing the positions of the less liquid mid and small-cap stocks, said McDermott.
“The liquidity issue has caused everybody to reassess these questions and I think it will cause Neil to re-assess as well.”
Woodford’s explanation ‘defies logic’
Sleep said Woodford’s claim that some of his stakes have become larger over time because they performed well “defies economic logic” and “does not bear close inspection,” noting he owns big positions in many companies, and few are winners.
FTSE 250 doorstep lender Provident Financial, one of the top 10 holdings in the Woodford Equity Income fund, has seen its shares dive 30% so far this year and been plagued by recent problems. Woodford Investment Management owned a 25% stake at the end of April 2019.
RM2 International, a ‘smart’ pallet provider which he owns a 60% stake in, is haemorrhaging cash and suspended trading on Monday.
Woodford’s most recent explanation also ignores the fact that he chose to buy big stakes in companies, often taking 30% stakes in companies when he was at Invesco and snapping up a further 20% stake when he started his own firm, said Sleep.
“Taking such large stakes distorted stock prices and makes them very difficult to sell in an orderly manner.”
‘I need to own significant stakes’
Woodford’s position contrasts sharply with his position years ago when he said he needed to own significant stakes in businesses in order to optimise the portfolio and to capture the best economic opportunities.
In mid-2017 when the equity income fund was in the midst of a performance slump and investors were starting to become restless Woodford tackled a series of investors’ frequently asked questions, including “Has Woodford lost it?” in a segment on his website entitled ‘Awkward Corner’.
There he spent a minute and a half defending his hefty positions in companies, stating it is something he has done for his “entire career” and describing it as “a natural approach of an active fund manager”.
“I have for my entire career owned large stakes in businesses that we’ve invested in, in small businesses and indeed in large ones too. That is the natural approach of an active fund manager that is doing something different than the index.
“But it is absolutely the case that in optimising the portfolio and in capturing the best economic opportunities in the portfolio I need to own significant stakes and have been comfortable owning significant stakes in companies both small and large.”
Woodford said the only reason investors were suddenly complaining about his taking hefty positions in unquoted and smaller companies was because performance had been poor. “When things are going well, I never get asked this question but when things are going badly it is one that crops up all the time.”
Portfolio Adviser approached Woodford about his shifting stance on small-caps but did not get a response.
