I’m sorry to admit that the longer I’ve been in this business, the more cynical I have become. The crux of the problem is that on the whole, the industry product is opium. Rather OPM – Other People’s Money. Who cares what the clients outcome is? As long as investment management companies continue to charge their fees, they will continue to make a profit, pay their staff bonuses and the shareholders their dividends.
This mindset leads to short-termism and groupthink.
No big company fund manager ever got sacked for losing clients money or offering poor returns, as long as their peer group also offer similar returns. It’s OK to disappoint the client as long as other competitors give similar returns. This leads to a general consensus, where the average rules. No one dares take an alternative view. In rising markets everyone wins, in falling markets everyone looses. That’s OK, your job is secure. Same with tracker funds. In a rising market everyone wins and in a falling market everyone loses.
Enter Neil Woodford
I’ve long been a fan. I track what he does. He exhibits bags of (un)common investment sense. He remains grounded even when markets are flying. I would very much like to meet him.
He has made his name by choosing to invest long-term in fags and drugs. Cigarette companies have been very cash generative as have the pharmaceutical companies. Boring, boring, sound, long-term investments. To this he adds smaller companies and non-listed companies. His track record and reputation stem back decades, since his days at the helm of a couple of huge UK Invesco Perpetual funds and the Aberdeen Investment Trust. He is without a doubt our own, home-grown investment royalty. When he left Invesco to form his own business, investors followed him. Soon his business managed £10’s of Billions. Three years in, his deciples are now leaving him in droves and the amount he manages has taken a serious dent. Are his superstar days over? I think not.
What goes around comes around
This is not the first time he has dropped from the top to the bottom of the league tables. Investors have short memories, but I remember the last time there was a crisis in confidence in his ability. It was 1998. The top performing UK funds were all chasing the new growth shares. New technology companies that just couldn’t fail. Nobody wanted the sort of shares he held in his fund. You know, those sensible, safer, long-term cash generative, stable businesses. With their valuable assets and understandable business plans. No they wanted shares that were doubling in value over a year. New companies with no profits, no dividends, but just bags of hype.
Woodford said no, so he suffered for a couple of years until gravity finally caught up with these high-flying, growth shares in early 2000.
He is saying no again. He is being forced to explain his drastic under-performance and his customers are leaving, chasing get rich quick schemes. Granted he has seen some dramatic falls with Provident Financial and Astra Zeneca this year. But setbacks do happen. Always have and always will.
When Woodford under-performs I know to pay attention. The investment crowd are throwing caution to the wind. The consensus bunch are all chasing the same “Hot” shares. I hope they can find buyers when they are forced to off-load these same shares in the future. Woodford acts like a lighthouse, giving off his early warning of impending doom if you continue on the same course. I don’t see too many listening.
What are we doing?
Woodford’s funds don’t hold much cash, just about 5%. Even our Aggressive Portfolio holds double that, with our Moderate Portfolio and Cautious Portfolios holding even more cash.
The cash acts like our “Airbag” to cushion us from future accidents. A few have asked why I don’t invest more of it, indicators like Woodford have served me well in the past, I am likely to always heed his warnings. The time to invest more heavily will come. In the meantime I remain patient, unlike many of his customers.