Woodford: What Went Wrong?

Unless you have been living under a rock, you will be aware the proverbial has well and truly hit the fan for Neil Woodford as of late.

At the height of his pomp, Woodford was promoted in the media, reknowned as a star fund manager of our generation and even heralded as Britain’s answer to Warren Buffet.

During his tenure at Invesco Perpetual, an initial investment of £1,000 would have returned just over £25,000 prior to him leaving. This averages out to a rather tasty 13.75% per annum over 25 years.

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His bottom up investment style, which focused on value and underlying fundamentals of each business to drive stock selection proved fruitful. Significant outperformance versus both his peers and the FTSE All Share index followed.

This disciplined style over this timeframe served him well enabling him to avoid the sectors where other investment managers were badly burnt.

For example, late in the 90s he shunned “a la mode” technology stocks at nose bleed valuations, thus avoiding the fallout when the bubble burst and values dropped sharply.

He pulled off a similar feat between 2008- 2009 steering clear of bank shares, in preference for tobacco stocks which made strong gains when the credit crunch bit.

“Contrarian Investing is an investment strategy that is characterized by purchasing and selling in contrast to the prevailing sentiment of the time. A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricings in stocks and shares”.

Contrarian investing involves buying stocks which are unloved and overlooked by the general maket at bargain basement prices. It can be a lonely, uncomfortable style involving sustained periods of poor performance with the risk of ending up with egg on you face.

In October 2013, Woodford left Invesco to setup up his own fund managment firm. Woodford Investment management launched it’s flagship Equity income fund on 2nd June 2014, raising a UK record £1.6bn within just two weeks. The fund achieved an annual return of 16% in it’s first year and at it’s peak managed £10.2bn worth of assets.

Fast forward to the suspension of the fund in June and assets under management have been reported to have shrank by a whopping 64% to just £3.7 billion.

Poor performance over the past three years has been the catalyst for investors pulling the plug on Woodford, including millions of pounds of institutional money from the likes St James Place and Hargreaves Lansdown.

An investment of £1,000 at inception would have actually lost money over a five year period and now be valued at £946. Whereas the FTSE Allshare would have relaised a gross return of £1,330 over the comparable period.

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