It has been a tough year for the former star when assets in his flagship fund have more than halved.
- It is the nature of a contrarian value-focused manager that there will be periods of underperformance
- The magnitude of the underperformance is worrying when compared to value managers with a similar approach
- His performance also raises questions about the open-ended structure, where significant outflows compound poor performance
Woodford himself believes he has been treated harshly. The press that built him up has been quick to knock him down and he has made it clear that he believes not all of the criticism is fair. Certainly, it is the nature of a contrarian value-focused manager that there will be periods of underperformance. That it has coincided with the launch of his new venture is unlucky, but the two elements are not necessarily related. He has been delving into unloved UK domestic companies, which have inevitably felt every bump and shudder of the road to Brexit.
However, the magnitude of the underperformance is worrying. Schroder Income or JOHCM UK Equity Income are both run on value lines with a contrarian feel and they are up 4.8% and 0.8% respectively, compared to a drop of 7.1% for the Woodford fund. Woodford might bounce back this year, as he confidently predicts, but it is a significant amount to make up.
The Woodford experience highlights a number of problems. The first is the limitations of the open-ended structure. Woodford is a high profile manager who has been investing larger amounts in smaller stocks. When he has needed to meet redemptions, he has had to sell out. The market knows this and short-sellers have moved against him. It takes an astonishingly skilled manager and trading team to manage this type of problem.
The second problem is of managers changing environment. Woodford is clear that he has built Woodford Investment Management to be the perfect environment for outperformance with more dedicated traders and analysts, but nevertheless his experience is not uncommon. Plenty of ‘star’ managers have struggled when they have changed environment. Anthony Bolton saw a difficult end to a stellar career when he moved to run a Chinese equity portfolio, for example. If it takes a village to raise a child, it takes something near that to create a star fund manager.
Of course, you probably wouldn’t bet against him. This is the toughest of his tough times, but he has shown himself capable of bouncing back. The question is more whether there are better options out there without the nail-biting ride.
