When I originally discussed the substance of this column with Wealthwise’s editor at the start of December, I thought the idea of a piece pointing out ‘what Neil Woodford got right’ was refreshingly contrarian. Now, having seen the interviews the man himself was giving before Christmas, I am not so sure – but having taken a deep breath and had a strong cup of tea, here goes.
In their 2019 paper, More Superstar Investors: Neil Woodford and Terry Smith, Thomas Maloney and Paras Bakrania of quant shop AQR looked at the performance of Woodford’s Invesco Perpetual UK High Income Fund, from August 1993 to February 2014 and found he beat the market by 3.1% a year and boasted an impressive Sharpe ratio of 0.44. They also found Woodford successfully capitalised on the value, quality and, ironically, low-risk factors – and, even after allowing for these, he still generated alpha of 2% a year.
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Looking back at this track record, he does seem to have been a successful strategist, ably navigating the dotcom bubble from 1998 to 2000 and doing very well in the value market through to 2007. After that, I will withhold judgement as I suspect the sheer size of flows – he ultimately managed £33bn – distorted the price of his stocks and boosted his performance for a while.
That size of fund flows is something the quants at AQR missed and they also did not look at Woodford’s performance after Invesco, which was not so stellar. In the final three years to October 2019, the Woodford Equity Income Fund lost nearly 40%, which would have put a chunky dent in his long-term outperformance at Invesco, although it would not have wiped it out.
Early-stage companies
In his role as a strategist, another thing Woodford got right was to invest in early-stage companies. He was early into backing venture capital in what was to be one of the greatest ever bull markets for this type of investing – just look at the money Scottish Mortgage made in venture capital through to the end of 2021.
Woodford was not Scottish Mortgage’s James Anderson, however, and did not shine at venture capital investing as the performance of Woodford Patient Capital Trust shows. From its launch in April 2015 to December 2019 when Woodford lost the mandate, Woodford Patient Capital lost about two-thirds of its value and indeed sank much lower subsequently.
Also under the heading of strategy, Woodford transitioned from value to growth around 2016/17 – just as the bottom dropped out of the value market and we saw that amazing run in growth stocks through to the end of 2021. Unfortunately that amazing run in growth stocks rather passed Woodford by.
Personally, I wonder if his transition from value to growth could have been accidental rather than deliberate, as Woodford sold his more liquid value stocks and held onto his illiquid growth stocks – but nevertheless it happened. Given Woodford was invested in growth stocks in a growth market, however, his underperformance is all the more mystifying – unless you account for some kind of ‘reverse Midas touch’.
By this I mean that Woodford was a big investor when he was at Invesco, holding substantial stakes in smaller companies, and when he set up his own fund, he bought more of many of the same companies. Then, when his performance deteriorated and he suffered outflows, he had to sell these substantial holdings out of his own funds.
Magnet for shorts
Of course, this was at more or less the same time as his old funds at Invesco were selling down substantial stakes in the same companies and this alone would have served to depress his holdings’ prices. In addition, however, the overvaluation of many of his stocks had attracted the attention of short-sellers – for example, Kerrisdale Capital, who openly announced in September 2015 they were short Allied Minds.
The commentary by Kerrisdale from that time is informative as it pointed out Allied Minds was trading at 7x book value – an extraordinary multiple for an investment company – and highlights what can happen when one large investor buys up to 50% of the equity of a smaller company. Allied Minds share price peaked at nearly £7 in 2015 and finally fell to 13p before it delisted. Unfortunately, this pattern was repeated across many of Woodford’s holdings as he became a magnet for the shorts.
Maybe I am damning Woodford with faint praise but his performance at Invesco was good – with some caveats – but, after that, it was awful. Arguably there were some broad portfolio actions that could have played out well for his investors, but the execution was poor to the extent that the Woodford name is held in markedly less esteem by investors and advisers today than it was in the years before he chose to put it above the door of his own shop.
Peter Sleep is investment director at Callanish Capital
“Looking back at his track record, Neil Woodford does seem to have been a successful strategist, ably navigating the dotcom bubble from 1998 to 2000 and doing very well in the value market through to 2007.
