Should you pay 1.5%+ for Neil Woodford to run your money ?

Monday, Oct 08 2012 by
17
Neil Woodford
Neil Woodford

I once was chatting to an broadsheet financial journalist who told me that articles on only three topics make up the majority of their online readership - Buffett, Goldman Sachs and Gold. It is perhaps then little surprise that the piece I published on Friday about Warren Buffett's edge (or lack of) inspired a great amount of debate, not only on this site but also around the Web. It's extraordinary that we care so much about Buffett, when the evidence suggests that his best days might be decades behind him. Surely we should spend more time investigating who is or may be the Warren Buffett of today.  It's on this note that we should take a closer look at Neil Woodford...

A great fund manager?

For those that don't know Woodford, he's had an esteemed career as a fund manager at Invesco Perpetual. As head of investments Woodford controls something like £20bn of assets there, the majority of which are invested in higher income stocks.

A quick look at his career history confirms that he's got a terrific record. In fact, it's generally believed that Woodford may be the finest fund manager in the country, and the ratings agencies fall over themselves to give him an A* - e.g. Citywire, and Trustnet. To put his performance in perspective, over the last decade he's returned a compounded 11.3% annualised return compared to the comparatively paltry 6.3% that Warren Buffett managed. Woodford has turned £100 into £290 for investors over a decade in a time when Omaha's finest only managed £185.

I've been tracking Woodford for some time, but have been recently reassessing his performance in the light of research from Societe Generale on 'Quality Income' stocks. For readers that are unfamiliar, their research highlights that dividend paying mid/large caps that display both high quality (in terms of their F-Score) and low bankruptcy risk have a tendency to significantly outperform the market.

As an investigation I decided to create a really dirty comparison of Woodford's record versus the different segments of the market that Soc Gen highlight. This is a really horrid comparison as actually the trustnet charts are quoted in GBP whereas the Soc Gen indexes are global and quoted in EUR but I've put this together merely to serve as a visual cue for discussion.  We can see clearly that...

 

  • The general equity markets have flatlined over 12 years causing no end of pain.
  • High Yielding stocks have done much better than the overall equity market, generally doubling investors money.
  • The 'Quality Income' segment of the equity market has done even better. Tripling investors money.
  • Woodford's returns have also been exceptional, tripling investor's money with a notably high correlation with 'Quality Income'.
  • Woodford's peer group appear to be really quite inept. Their performance fails even to keep up with the High Yield segment of the market.

 

Are you feeling lucky punk?

If you were picking an income fund manager in 2000, would you have had the smarts to have picked Woodford? Woodford was managing £2bn between 1999 and 2002 and according to interviews at the time was pessimistic on a recovery and more focused on the opportunities small and mid cap companies offered. But as the market rallied his success brought massive inflows into his funds forcing his hand to invest in much more liquid stocks. Could it be that his early success rather serendipitously gave him little option but to invest in the very segment of the market (Quality Income) that would perform best over the decade? He was quoted in a Moneyweek interview recently which highlights his current strategy:

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"We continue to focus the portfolio on what we believe to be fundamentally cheap companies, many of which are termed as blue chip or the 'new sovereigns', and where we believe valuations continue to underestimate their ability to grow through a prolonged period of economic stagnation."

I do find myself reflecting on a passage from one of my favourite books - Nicholas Naseem Taleb's Fooled by Randomness. In it he compares the fund management community to a coin flipping contest where each of 10,000 fictional managers flips a coin annually, winning or losing $10k and keeping or losing their job. After 5 years there are 313 managers left (3.13%) having made money 5 years in a row 'out of pure luck'. "If we throw one of these traders into the real world we would get comments on his remarkable style, incisive mind and the influences that helped him achieve success".

Neil Woodford has managed to focus on the precise areas of the market that has performed best over the last decade. His peers have clearly, in aggregate, failed to grasp what he through skill and good fortune anticipated - that high quality income stocks would outperform.  But given the additional constraints which managing £20bn or so brings can we expect Woodford's future performance to keep up with his past? There are clearly a huge number of investors betting 1.5% per year in fees that he can, in spite of the evidence suggesting that after huge inflows funds struggle to maintain their historic record.

A systematic Woodford portfolio?

I've just recently sparked some debate for suggesting that Warren Buffett's investment style could be mimicked as a systematic investment strategy,  but here perhaps is another case in point.  Woodford's style appears to be so closely correlated to those of Quality Income stocks that perhaps investors taking a punt on him might be well served by saving most of the 5% initial charge and 1.5% fee they pay a year to Invesco and choosing a cheaper and more systematic approach. 

These days, using a high quality set of screening tools,  it is relatively simple and inexpensive to build well diversified portfolios full of the kinds of low-volatilty, safe, profitable, dividend paying, cheap mid to large cap stocks that a Buffett or Woodford might choose. In fact our models of quality income strategies have had extraordinary returns over the last 12 months, putting many fund managers to shame.  For those who don't fancy picking their own stocks there are an increasing number of excellent low cost options such as the Soc Gen Quality Income Index ETN which trades under the ticker SGQI.  Just remember that past performance is no indication of future returns and for all I know the next decade may be kinder to small cap growth stocks.  

The halo effect that surrounds heroes such as Buffett or Woodford can lead many to take leave of their senses. Just because someone has done well in the past is no indication they will in the future.  Hindsight is a wonderful thing, but investing based on it blindly and without thought can be a recipe for pain.  Perhaps it's better to learn from these great investors and put their insights to work for oneself at a fraction of the cost.

 


Filed Under: Income Investing,
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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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6 Comments on this Article show/hide all

emptyend 8th Oct '12 1 of 6
8

The answer is "no - certainly not"

Woodford has had a good run over the last 6-7 years precisely because his favoured "dividend paying stocks" as a group have:

a) been sought after by yield-hungry investors as interest rates in general have plummetted and

b) outperformed riskier growth/momentum strategies since 2007/8 as risk aversion has increased substantially.

These are one-off effects, and certainly won't be repeated (not least because interest rates cannot fall much further).

Additionally, I recall advising my sister on her choice of funds for investing a litigation windfall in around 2002/3......and I found Woodford's performance over the preceding years to have been unexceptional (and indeed I then noted that he underperformed for several years after the investment was made in a range of funds).

As an aside, I'm engaged in having to deal with my stake in a small pension fund that is being wound up. The trustees have negotiated an annual fee of 0.3% with a well-known company owned by a well-known banking group. In contrast, I have an existing policy with Aegon, which would charge me 1%pa, plus 5% bid-offer spread.....plus an under-allocation of my funds if I transferred the cash to them......

....one must be extremely wary of putting fresh money into ANY funds simply because they have done quite well in the past. I see no reason for anyone to be paying much over 0.5-0.75% to any fund management group in the present low rate, low return, low volatility environment ....your money will just get slowly bled away.

ee

 

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zangdook 14th Oct '12 2 of 6
3

investors taking a punt on him might be well served by saving most of the 5% initial charge and 1.5% fee they pay a year to Invesco

No-one actually pays that, do they? If you buy through Hargreaves Lansdown, for example, you pay no initial charge and get 0.25% of the 1.5% annual fee rebated. This is not an endorsement of HL; I'm sure other brokers arrange discounts and rebates too.

 

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peterg 14th Oct '12 3 of 6
2

In reply to zangdook, post #2

No-one actually pays that, do they?

I think you will find that many do. Many who use "I"FAs will, and they probably make up a large section of investors in funds like that.

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djpreston 15th Oct '12 4 of 6
4

A lot of this will change quite radically when the RDR comes into force.

It does, however, surprise me just how many discretionary managers continue to use "retail" units with their full AMC and higher AMCs than the insitutional class of units where there are minimal (or no) initial charge and a much reduced AMC. We, as you might have guessed, go down the institutional unit route.

Fund Management: European Wealth
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dodge1664 23rd Oct '12 5 of 6
2

One of the key investment decisions of the last 10 years was to get out of financial stocks by 2007 at the latest. Woodford got that one right as he likes to take a macro economic angle on things. He didn't however get back in in 2009, so didn't benefit from the rebound as much as he might have done.

Soc Gen produced their quality income backtesting results by excluding financials, which obviously had a huge impact. You could argue that its reasonable to exclude financials as they can be hard to analyse. Or perhaps a hefty dose of hindsight was involved.

I respect Woodford as a manager, but I think I can produce similar results by learning from him, and I'd rather do that than pay the management fee.

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Edward Croft 23rd Oct '12 6 of 6
2

In reply to dodge1664, post #5

Hi dodge... thanks for the comment. Financials can be very hard to screen for quantitatively. Their financial ratios are very skewed by the enormous loan assets on their balance sheets. As a result many strategies (like Greenblatt's Magic Formula) do exclude them and similarly some algorithmic ratios like the Altman Z-Score (bankruptcy risk indicator) exclude them too.

I'm keen to find indicators and screening strategies that we can include for analyzing financials so if you or anyone here knows of any good ones please do let us know and we'll add them to the website.

We've not modelled the distance to default measure that Soc Gen actually use in their research paper (yet!). There's some evidence that it can be useful for predicting financial distress in financials though - e.g. here http://j.mp/WGEbFF

Blog: Follow @edcroft on Twitter
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About Edward Croft

Edward Croft

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CEO at Stockopedia where I weave code, prose and investing strategies to help investors beat the stock markets. I've a background in the City and asset management but now am more interested in building great stock selection tools for the use of investors online.   Traditionally investors online have had very poor access to the best statistics, analytics and strategies for the stock market and our aim is to set that straight.  High Quality fundamental information has been prohibitively expensive in the past and often annoyingly dull. People these days don't just want to know the PE Ratio and look at a balance sheet. They expect a layer of interpretation over data, signal from noise and the ability to know at a glance whether a stock is worth investigating or not. All this is possible using great design and the insights gleaned from quantitative research.  Stockopedia is where we try to make it happen ! more »


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