Lost out with Woodford? Here's why DIY investing makes sense...

Wednesday, Jun 05 2019 by
41
Lost out with Woodford Heres why DIY investing makes sense

Neil Woodford is one of Britain’s best known fund managers. But after a striking run of poor performance, the gravity of which is hard to overstate, these days he’s making headlines for all the wrong reasons.

This week Mr Woodford slammed down the shutters on his Woodford Equity Income fund, almost five years to the day after launching it in 2014. After months of outflows and seemingly endless bad news from the portfolio, Woodford’s played one of the few cards that any fund manager would choose. By gating the fund he’s stopped the redemptions for now, but a lot of damage has already been done - and the future is unclear.

For some, the warning signs around the Woodford Equity Income fund have been in plain sight for some time (more on that shortly). But there are going to be many others - including owners of it - who’ll be left wondering how on earth this has happened...

After all, Woodford is one of the biggest names in UK money management. He’s got a huge profile in the financial press and major support from fund platforms like Hargreaves Lansdown. In fact, Hargreaves only dropped the fund from its top Wealth 50 after it was suspended this week.

Moreover, his fund was supposed to be a solid, value-focused ‘equity income’ strategy - nothing exotic there, you might think. Woodford had a long track-record of decent returns (largely at Invesco Perpetual) pursuing just that approach. He made his name as a contrarian over more than a decade, holding high yielding blue chip stocks while everyone else was buying (glamorous) dot-coms. So what changed?

Back in June 2017 the size of the Woodford Equity Income fund hit a high of £10.2 billion, but has since fallen to £3.7 billion.

5cf78f5b820edWoodford1.png

Unsurprisingly, the financial press has gone to town on picking over the causes and consequences of this, but here are a few reasons:

One issue is that while he’s been running this fund, Woodford’s value-focused philosophy has been at odds with what’s been working in stocks. Over the past five years equity income has generally been out of favour, while growth and momentum have led the market. Back in the early 2000s, he made a mint when conditions were completely the opposite. And while it’s likely that value investing will come back into…

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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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Provident Financial plc is a United Kingdom-based non-standard lender. The Company's divisions include Vanquis Bank Limited (Vanquis Bank), Consumer Credit Division (CCD) and Moneybarn. Its segments include Vanquis Bank, CCD, Moneybarn and Central. The Company serves non-standard credit customers with a range of products from credit cards and car finance, to home credit and online unsecured, and guarantor loans. Vanquis Bank is engaged in the provision of credit cards. CCD is engaged in home credit business in the United Kingdom and Ireland. CCD includes Provident, which offers home credit loans; Satsuma, which is an online instalment loan product, and glo, which is a guarantor loans product. Moneybarn is engaged in the provision of vehicle finance. Its subsidiaries within CCD are Provident Financial Management Services Limited, Provident Personal Credit Limited and Greenwood Personal Credit Limited. Its Central segment includes its subsidiary, Central Provident Investments plc. more »

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34 Comments on this Article show/hide all

pka 8th Jun 15 of 34
4

In reply to post #482246

Cold fusion is the modern day equivalent of perpetual motion machines. Both would be fantastic if they could be made to work; unfortunately the laws of physics mean they can't.

How stupid and irresponsible of Woodford to invest a large proportion of the precious savings of his fund-holders in a cold fusion business. Woodford deserves all the criticism he has been getting from the media over the last few days.

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Graham Ford 9th Jun 16 of 34
4

The galling thing in some ways is that many people invested with Woodford posted on his company’s blog expressing their concerns in a well thought out way over a significant length of time but it appears that team Woodford were so confident they were right that they ignored all these warnings as well as the failings of large numbers of their investments. I sold out of WPCT when I realised that it was taking many positions in pharma/biotech stocks that can have a near binary outcome based on passing or failing a particular stage of clinical trials. He also seemed to have acquired a bizarre strategy of when a company had a dramatic set back buying even more stock in the struggling enterprise. Perhaps team Woodford had been gripped by sunk cost fallacy.

However, none of this makes me think that one should take the DIY approach to all of one’s portfolio.  There are some very talented managers out there who are worth using imo.  Just don’t stick with them if they start taking many decisions that are clearly poor or if not poor very high risk.

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JohnEustace 9th Jun 17 of 34
3

I see that Industrial Heat is one of the holdings that he listed in Guernsey to keep below the limit for unlisted companies in his fund. So technically it no longer counts as unlisted. But as only his holding is listed on this small exchange there is no liquidity or dealing or actual market valuation until he tries to sell some.

https://citywire.co.uk/wealth-manager/news/revealed-woodford-lists-unquoted-stakes-offshore-to-stay-below-limit/a1216022

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pka 9th Jun 18 of 34
1

In reply to post #482306

Hi John,

You wrote:

"I see that Industrial Heat is one of the holdings that he listed in Guernsey to keep below the limit for unlisted companies in his fund. So technically it no longer counts as unlisted. But as only his holding is listed on this small exchange there is no liquidity or dealing or actual market valuation until he tries to sell some."

But are there any 'greater fools' around to buy shares in a company which is developing a 'cold fusion' device that Woodford's own web site says "cannot be explained by the known laws of physics" and which has never made a profit nor paid a dividend? This is why I cannot understand on what reasonable basis, according to the following article, "Link Fund Solutions, the trust’s appointed alternative investment fund managers, dramatically upgraded the value of Industrial Heat by 357% to $112.9 million (£85.2 million)".

https://citywire.co.uk/investment-trust-insider/news/woodford-patient-leaps-on-spike-from-industrial-heat/a1157456

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pka 9th Jun 19 of 34
3

In reply to post #482321

Furher to my previous post, I have just downloaded Patient Capital's annual report for the year ending Dec 2018 from the Woodford web site. It says the following about Industrial Heat:

"Meanwhile, in September, Industrial Heat also saw a meaningful valuation uplift. The company has built a platform of new energy technologies focused on harnessing hitherto poorly understood or neglected energy science, including cold fusion. We are fully cognisant of the scepticism that has surrounded the theory and history of this branch of science. However, we believe the potential disruptive implications of a new, substantially more efficient source of energy deem the various fields of neglected energy science worthy of further investigation. We funded Industrial Heat in 2015 to engage credible world-leading institutions to rigorously assess the progress of its technologies.Following some disappointing initial developments, the investment was written down in 2016. Since then, however, progress within the portfolio of technologies has shown increasing promise. Hence, with the company last year raising capital from other investors to continue the path to commercialisation, the valuation of the company was adjusted up to reflect this progress. Although this is positive progress for Industrial Heat and the Company, it remains early days in the development and commercialisation of these technologies."

So it seems that Industrial Heat has managed to find some other fools, sorry investors, who are willing to put capital into the development of a cold fusion device, and that was the basis for the 357% increase in Patient Capital's valuation of its holding in Industrial Heat to $112.9 million. But when Industrial Heat has spent all its investors' capital on development and has failed to produce a commercially viable cold fusion device, which is overwhelmingly probable given our current understanding of physics, what will be its valuation then? I suggest zero.

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JohnEustace 9th Jun 20 of 34
4

pka,
From reading around the web, it seems someone put $50m into it at the enhanced valuation. Who they were, whether it was completely fresh money from a truly greater fool, I have no idea, but I would think it worth asking about if I was a regulator. Or an aggrieved investor thinking about a class action case.

As someone commented elsewhere this company is worth either a trillion dollars or nothing. I think we both incline towards the second option.


Edit - overlapped with your last post

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pka 10th Jun 21 of 34
1

In reply to post #482331

Hi John,

You wrote:

"As someone commented elsewhere this company is worth either a trillion dollars or nothing."

I think Woodford was focused of it being worth a trillion dollars, but he seems to have ignored the probabilities of the two binary outcomes. In my opinion, the probability of it being worth a trillion dollars is less than 0.01% and the probability of it being worth zero is more than 99.99%. Is it wise to have 9% of your portfolio in something with those chances of success and failure, even if the profit from a sucessful outcome would be huge?

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Anthony127 10th Jun 22 of 34
5

Doing your own investing is certainly a realistic alternative where people have the appropriate competence. Even if you have this competence I still feel that Investment and Unit Trusts are a very useful supplement to DIY investing.

To me their main benefit is their easier access to international markets and giving investors access to growth sectors which they may not understand so well e.g. Technology or Healthcare; in these cases you are delegating to the fund manager.

The main issue with Mr Woodford appears to have been his change of style. I am sure that if Warren Buffett decided to change his style to day trading he would be a good deal less successful and may (partly at least) lose his reputation. Of course he wouldn't do this because one of his main rules is to stay within his circle of competence and this appears to be the main lesson here.

There are a number of first rate fund managers out there still performing very well and I think it would be a mistake to think that they are all likely to succumb to similar problems.

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pka 14th Jun 25 of 34
1

According to the FT article, Woodford has invested a total of 54 million pounds of his fund holder's money in a company developing a 'cold fusion' device. Any of the physics lecturers at Oxford University in the same city as his fund's headquarters would have told him that such a device has zero probability of ever working, had he bothered to ask their opinion. Perhaps he did ask, but ignored what they said. Woodford chose instead to rely on the deep understanding of science and technology that he had gained from his degree in agricultural economics.

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wilkonz 17th Jun 27 of 34
3

Thanks JohnEustace.
A fascinating link from the FT. In summary, (according to one of the many cynical comments which I've paraphrased):

Mr Woodford bought cheap shares in an unknown jam-tomorrow company called Benevolent AI. He then bought more shares at a higher price which increased the NAV of the company. This enabled him to charge investors more in performance fees. Etc. Etc.

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wilkonz 17th Jun 28 of 34

A couple of announcements from Benevolent AI

The company’s advanced technology has been shown to outperform human scientists in understanding the cause of disease and is capable of quickly generating drug candidates at scale. The technology is also able to decipher the molecular process of disease and link these disease signatures within patients to ensure that the best drug candidate is given to the best patient responders – the ‘right drugs in the right patients’...

...To achieve this, BenevolentAI has created a bioscience machine brain, purpose-built to discover new medicines and cures for disease.  Proprietary algorithms perform sophisticated reasoning on over 50 billion ingested and contextualised facts to extract knowledge and generate complex insights into the cause of diseases that have, until now, eluded human understanding.

This all sounds too good to be true...



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Trident 17th Jun 29 of 34
2

The Rossi character who was the first investment of Industrial Heat has been around for years peddling his E-CAT 'technology'. A look in the right places would have shown that he proposals of generating excess heat output was largely debunked years ago, and I am amazed that he managed to find a mug to put money into 'research'.

There are legitimate research departments doing research into this area, after years of it being career suicide for scientists to approach it, but its all pretty low key stuff, and so far nothing major is in the pipeline, so as interesting as it may be I can't see that a mainstream investor should ever put money into without saying it is extremely risky, and not just a matter of patience.

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JohnEustace 18th Jun 30 of 34
4

The FCA have opened an inquiry. There's an explanation of the background leading up to the fund suspension in their letter to Nicky Morgan.
https://www.fca.org.uk/publication/correspondence/lf-woodford-equity-income-fund-letter-tsc.pdf

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wilkonz 19th Jun 31 of 34

Thanks for link to Nicky Morgan's letter. I wasn't aware, previously, of the Guernsey based TISE (The International Stock Exchange) but it seems to be an exchange that lists securities that can't be listed anywhere else. In response to press articles it suspended three of Woodford's investments. But one has to ask how those securities (presumably including those discussed in this thread - Benevolent AI and Industrial Heat) got listed in the first place. Was there any due diligence? It would seem that TISE is little more than a rubber stamp for fund managers who want to be reckless with other people's money.

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Trident 19th Jun 32 of 34
3

http://newenergytimes.com/v2/sr/RossiECat/Andrea-Rossi-Energy-Catalyzer-Investigation-Index.shtml

A full breakdown of the Rossi story for anyone that's interested. Not pretty reading!

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pka 19th Jun 33 of 34

I wonder how much money Woodford has made in total from the annual management fees of his Equity Income Fund (which are charged as a percentage of the total Net Asset Value of the fund) that were based on a ridiculously marked-up valuation of that fund's holding in Industrial Heat. In reality, that holding is almost certainly worth zero, firstly because Industrial Heat's technology was originally developed by a convicted fraudster (Rossi), and secondly because there is no realistic prospect of any company ever developing a commercially viable cold fusion device as that would be contrary to our current knowledge of physics.

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