UK's Top Fund Manager: "So Many Lights Flashing Red, I'm Losing Count"

Neil Woodford is the founder of Woodford Investment Management, with $20 billion under management, and was appointed a Commander of the Order of the British Empire (CBE) for services to the economy in the Queen’s 2013 Birthday Honours List. However, he’s not very happy in his latest outlook for equity markets, nor is he happy with the recent performance of his funds, although he’s been in this situation before - ahead of the tech crash in 2000 and the sub-prime crisis in 2008. According to the Financial Times.

Neil Woodford, the UK’s most high-profile fund manager, has said he believes stock markets around the world are in a “bubble” which when it bursts could prove “even bigger and more dangerous” than some of the worst market crashes in history. The founder of Woodford Investment Management, which manages £15bn of assets, warned investors to be wary of “extreme and unsustainable valuations” in an interview with the Financial Times, likening the level of risk to the dotcom bubble of the early 2000s.

“Ten years on from the global financial crisis, we are witnessing the product of the biggest monetary policy experiment in history,” he said. “Investors have forgotten about risk and this is playing out in inflated asset prices and inflated valuations. “Whether it’s bitcoin going through $10,000, European junk bonds yielding less than US Treasuries, historic low levels of volatility or triple-leveraged exchange traded funds attracting gigantic inflows — there are so many lights flashing red that I am losing count.”

Woodford likes to be contrarian: few people believed that Brexit was a buying opportunity, for example. Given his value investing style, it’s not surprising that’s he’s avoiding high-profile momentum driven names and boosting holdings in old economy “bricks and mortar” companies, literally. The FT continues.

He said this (flashing red lights) was why he was staying out of a host of expensive “zeitgeist” stocks, instead buying UK-focused housebuilders, retailers and banks whose share prices are discounting “economic Armageddon for the UK economy” following the Brexit vote. Mr Woodford shunned bank shares before the 2007 financial crisis and stayed out of the tech sector before the dotcom crash. Both hurt the performance of his funds in the short term, but ultimately cemented his reputation as one of the UK’s most revered money managers.“

In the dotcom bubble it was the old economy stocks which became profoundly unloved and undervalued and today in the UK stock market, it is domestically-focused stocks,” he said. “The funds I manage are positioned to exploit this opportunity and I am utterly convinced it will pay off when the bubble bursts — which I believe it inevitably will.”

He has been steadily raising his contrarian stake in the UK. Between September 2015 and October 2017, the proportion of the portfolio’s revenues derived from the UK increased from 41.9 per cent to 55.5 per cent.

In the interim, Woodford's contrarian style is literally killing his performance – his fund has the worst performance in its peer group - and previously faithful supporters have redeemed their funds. For example, from a peak of over £900m ($1.2 billion), Jupiter Asset Management pulled the remainder of its money out of Woodford’s funds in September 2017.

Aside from his contrarian approach, his performance has suffered from big hits to the share prices of a few Footsie 100 companies, including AA, Astra Zeneca, and infamously, Provident Financial. The latter was a top-5 holding and fell 66% in one day in August. The following month a casually dressed Woodford, sitting on a green sofa, released a video on Youtube, “Has Neil Woodford lost it?”. In the one minute broadcast, Woodford countered his critics.

“I don’t believe I have lost it. I believe I have the right portfolio, the right strategy to deliver the right returns to investors over the long-term. Things have been very difficult in the short-term, I’m sure people are disappointed, as I am, about short-term performance, but this is a long game…I’m not going to cut and run.”
Back to the FT interview in which he was pressed on his performance… 

In the interview, Mr Woodford admitted that his investment strategy has put him in “the most uncomfortable position I have been in during my career”. He added: “I don’t know when I’m going to be proved right, but I’m utterly convinced that I am right, as I have been right before.”

…and he stuck to his guns on value investing.

He spoke of the growing gulf between the prices investors are willing to pay for income stocks perceived as safe and dependable, and “unfashionable” stocks exposed to the UK economy, including early-stage businesses that are the target of his Patient Capital Trust. “There is always a subset of the market which falls out of favour as investors clamour for the fashionable stocks of the day, providing the fuel to power the bubble on through the final leg of its journey before it bursts,” he said.

“In a challenging global economic environment, the few stocks that are perceived to be capable of delivering dependable growth have, as in the early 1970s, become very popular but that popularity has manifested itself in extreme and unsustainable valuations. The market appears to be making the same mistakes again, but this time the bubble has grown even bigger and even more dangerous.”

We’re with you on that Neil, and thanks for sparing us the FANG and TATS acronyms. We particularly liked this quote.

“This is a period when stock markets have the ability to seduce investors (into believing) that making money is easy,” he says. But to abandon investment principles and “buy what’s going up, just because it’s going up . . . is the route to penury”.

While Woodford is scathing about what he calls a “prolonged period of market inefficiency and mispricing” he retains his humility, something which markets teach us all, painfully.

Does he ever doubt his judgment? “Daily,” he replies. “You must never, as a fund manager, stick your head in the sand saying ‘everybody go away, I’m right, I’m right, I’m right’. You’ve always got to expose yourself to criticism and the analysis that you may be wrong.”

Neil: capital markets are no longer serving the UK economy, or other economies. In fact, they are the problem, as we all know, and will be a bigger one. You could send your CBE back as a protest. John Lennon did (and they still named an airport after him).