Like many of you I am sure, I decided to react to recent equity market ‘volatility’ by conducting a personal financial health check on my Sipp and ISA portfolio of funds, however painful that might be.
I was proud of how my 65% cash holdings had held up in the storm – funny how our attitude to this most lifeless of assets changes in such times - and gave myself a pat on the back for the lack of fixed income in my asset allocation. As for the rest of it - well, the less said the better.
While at it I thought it worth checking whether the list of equity managers entrusted with my family’s (modest) fortunes needed some freshening up.
As a former fund manager and subsequently CIO/ CEO I have consistently railed against short termism in analysing investment performance. So I took a longer look – and one name stood out.
From the day Anthony Bolton announced that he would be leaving the management of the Fidelity Special Situations fund in 2007, Neil Woodford and his equity income fund has been a constant stalwart in my portfolio.
When Woodford left Invesco Perpetual in 2014 I followed him into his Woodford equity income fund. There he got off to a flying start - crushing his competition and vanquishing the index.
Recent comparisons however have put his star status up for debate. In the 12 months preceding the time of writing the Woodford Equity Income fund underperformed the FTSE All Share Index by 11.5%. In the preceding 12 months the underperformance was nearer 18%!
Compared to his sector peers Woodford has fallen to the bottom of the list over one and three years.
Plenty has been written about Woodford’s style of investing and his recent performance struggles (see chart above) have been well documented so I will not repeat those here. However, as an investor in his fund I need to respond to this performance downturn.
To help me I have similar experiences to draw on.
Some years ago I became the CEO/ CIO of a UK equity boutique. This gem of a business contained a number of star managers and, unusually, two in the same market, albeit adopting different styles. To protect the innocent, let’s call the first Ian and the second Steve. Both were experienced, longstanding, focused senior professionals – heavyweights in their sector.
Flushed with success and attention Ian came to me shortly after I took over and asked for additional mandates, including running a hedge fund in his style.
Steve said he was happy doing what he was doing and didn’t want to be distracted with either a hedge fund or institutional mandates, but Ian was persistent.
I had seen this before – a successful manager wanting to grow his profile and rewards by moving into the ‘sexy’ hedge fund space – it had even happened to me as a fund manager earlier in my career.
'OK,' I said, 'but first prove yourself by trading a dummy portfolio and then let’s see.' To his credit, Ian saw the merit of this.
About this time Ian’s performance started to tail off. Not dramatically but steadily. Over time his standing in the peer group fell from top decile to bottom decile - and stuck there.
Questions were being asked around the industry and the funds began to flow out – the dummy hedge fund portfolio was quietly dropped. Meanwhile Steve continued to churn out good investment performance and his star status remained unchallenged.
Increasingly I came under pressure to sort out the ‘situation’ with Ian – would we stay with him or would we force change. His franchise had been a big one for the firm and its setback was increasingly becoming a business issue.
As a good professional Ian was open about his performance difficulties – both with me as his boss and with clients from whom he never hid. My job was to try and understand the reasons for the setback and whether they were addressable. I was satisfied that Ian’s style had not changed – he had not gone ‘off-piste’.
We spoke at length about his core investment beliefs, why he bought and sold stocks and how he planned to react to the performance pressures. Again, I did not hear anything to suggest that Ian had lost confidence in his abilities.
As the quarters went by the noises grew but I stuck to my own conviction that you judge performance over the long term. In the meantime, as long as there are no grounds for change, you support your fund manager and take the pressure off as much as possible. By long term I mean three years, at least as long as the manager has earned this from past performance – Ian certainly had.
As time went by Ian’s performance did not improve sufficiently. It seems that in Ian’s case the world had moved on and the sources of value and the places he looked for it had changed.
In hindsight, Ian had been too stubborn in resisting the evidence. Eventually action had to be taken.
Together we planned a programme of change – younger rising managers would be introduced alongside Ian to freshen up ideas and Ian would gradually be re-assigned to mandates that focused more on what he was good at and allowed him gracefully to recalibrate his thinking.
Today, some years later, Ian with his rejuvenated focus is once again a first quartile manager in his sector. Steve, with his sole mandate, continued to deliver long-term consistent performance by sticking to what he was good at and by adapting his core investment beliefs to changing times.
How does this story help me decide what to do with my Woodford investments?
The three years I use to judge performance are not quite up which would suggest I stick with Woodford (pictured above) a little longer, especially given his previous excellent track record. But I must admit there are some niggling doubts.
Specifically, I have two concerns.
Firstly, I believe in focus – good long-term, consistent outperformance is tough enough so for goodness sake stick to what you are good at and do not be tempted to repeat success in different styles, strategies or – as in the case of Bolton – markets.
The Patient Trust for me was a warning bell and I would not invest in it until it had a proven long-term track record.
I now wonder whether this has been not only a distraction but an example of style drift - in my experience one of the main causes of performance disappointments. For the good of his franchise and reputation should Woodford say he is closing this, returning the money and getting back to basics?
Secondly, what Ian had - and I suspect Woodford doesn’t - is someone providing challenge and support. Is there anyone he can trust testing for signs of style drift or obdurate biases? Who is providing oversight and constructive proposals from a position of understanding and gravitas?
I am inclined to wait a little longer for signs of improvement or evidence of change designed to deliver more focus on the core income franchise.
However, with these doubts I will not wait long and certainly will not be using this period of underperformance to add to my holdings.