Neil Woodford’s boutique investment firm has landed in Tilney Bestinvest’s Spot the Dog report for the first time following three years of poor performance for his flagship equity income fund.
The £4.8bn Equity Income fund landed Woodford Investment Management as the second-worst fund house in Tilney’s biannual list, which highlights funds that have underperformed for three to five consecutive years on a relative basis.
According to the report, over the three years to the end of December 2018 investors that have put £100 into Woodford’s flagship fund would have seen that pot shrink to £87.
But the dishonour of ‘top dog’ belonged to Woodford’s former employer Invesco, which led Tilney’s list of laggards for the second time in a row. Since the last report, six months ago, the number of Invesco funds spotlighted for poor performance has grown from five to seven.
Again, three of the group’s funds in the doghouse belonged to UK equity manager Mark Barnett – mandates which he inherited from Woodford. His Invesco UK Strategic Income fund was third worst in terms of performance, producing a relative 3-year return of -23%, while his Invesco High Income was seventh on the list and the biggest dog fund at £7.9bn.
Woodford overshadows Barnett
However, Tilney said Barnett’s underperformance were overshadowed by Woodford’s appearance on the list.
“Although many people will be disappointed to see Invesco’s Mark Barnett fail to escape the doghouse, the big story in this edition is the inclusion of Neil Woodford,” the report said.
Unpacking the fund’s recent difficulties, Tilney noted the star manager’s contrarian bet on the domestic UK economy post-Brexit and stock-specific blow-ups had weighed heavily on performance and prompted sizeable outflows.
It added that Woodford Equity Income looks unrecognisable to the funds he ran at his former home Invesco due to its substantial exposure to small, illiquid companies and slimmed down holdings of FTSE 100 names.
“This is a very different profile to the funds that Woodford managed while at Invesco and may come as a surprise to some investors. We will be watching carefully to see if the fund manager can turn his fortunes around in the future.”
Darius McDermott managing director of Chelsea Financial Services said Woodford’s inclusion in Tilney’s list of worst offenders “is certainly no great surprise”. “The key question is what happens next with Neil.” Chelsea Financial Services recently named and shamed Woodford in its own list of underperforming funds.
Unloved value shouldn’t outperform in growth markets
Ryan Hughes, head of fund selection at AJ Bell, said he would expect value investors like Woodford and Barnett to struggle in a momentum-driven market.
“Deep value managers in a strong growth market should underperform and certainly Woodford and Barnett are very comfortable fishing in areas that are deeply out of favour with the market and are patient enough to wait for the market to turn and for these stocks to come back in favour.”
“But it doesn’t excuse the fact that Woodford and Barnett have had some difficult stock selection issues themselves within that particular style,” he added.
Woodford responds
A spokesperson for Woodford Investment Management for said Woodford has experienced periods of ups and downs throughout his career because of his value-orientated bias but added he would not change tack because “valuation is the only catalyst for investment returns that Neil has have ever trusted”.
“Having a clear, ‘bigger picture’ macro view has always been a critical part of Neil’s investment approach and he doesn’t prescribe to the crowded consensus view,” they said. “A key part of his strategy over the past 18 months has been to selectively invest in UK domestically-exposed equities, which are cheaper now than he has ever witnessed in more than 30 years of managing money.
“Neil believes there are risks in stocks whose share prices and valuations have risen on an increasingly false premise, stocks he has avoided. Instead, he is invested in companies with greater potential for upside whose share prices have been weak (in many cases very weak), predicated on a view, which he doesn’t share, that the UK economy is about to go into recession.”
Invesco responds
Invesco attributed its strong showing in the list to its contrarian take on UK assets.
A spokesperson said: “The UK stock market is, in our view, currently undervalued and a lot of UK-domiciled stocks are trading at very low valuations relative to their global peers, suggesting that much of the ‘bad news’ has already been priced in.
“Whilst we expect markets to continue to be volatile in the UK in the short term until the outcome of Brexit negotiations is clearer, we continue to believe in the long term value in the UK market and in our robust investment processes.”
Also in the kennel
Elsewhere Columbia Threadneedle, Artemis and St James’s Place, rounded out the top five dog groups in Tilney’s list. Behind Invesco, Columbia Threadneedle had the highest number of underperforming funds with six dogs in the latest edition, totalling £4.6bn in assets.
The number of ‘dog funds’ featured in the study has doubled in the six months since the last report, rising from 58 funds to 111 funds, and is over four times higher than the number of dogs caught this time last year. The amount of money languishing in dog funds has also risen to record levels, Tilney said.
This edition of the report included 14 ‘Great Danes’ or funds with over £1bn in assets each, including Woodford’s flagship fund, the trio of Barnett funds and Threadneedle UK.
Some fund houses avoided the kennel altogether in the latest edition of the report. Terry Smith’s and Nick Train’s investment boutiques Fundsmith and Lindsell Train were among the 13 names not included in the line-up of worse offenders, as was Baillie Gifford, Investec and First State.
