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Should You Buy Woodford Equity Income Fund?

Posted by: Brian Dennehy
Membership level: Free
This launch is certainly interesting, though perhaps more as a marketing phenomenon rather than an amazing investment opportunity.  Should you get on the bandwagon?  We explore that here.
 
The Woodford Myth?
 
There are some urban myths around the Woodford track record.  His Invesco Perpetual funds were outstanding, but so are a good number of others.  How you observe his track record depends on whether you are investing for growth or income-generation.
 
Most investors are interested in growth (strictly speaking “total return”, that is capital growth plus reinvested income).  And the main Invesco Perpetual funds of Neil Woodford (Income and High Income) were total return funds – for us the “income” adage was a bit of a misnomer.
 
That means we can consider the Invesco Perpetual Income fund against peers in the UK Equity Income and UK All Company sectors (the latter have a growth focus).
 
Over the last 10 years the IP Income fund was a top performer compared to other equity income funds, with Liontrust and Schroder not too far behind.  But over 5 years the fund is placed 33rd.  Hmmm.
 
If you broaden out the comparison to include growth funds, over 10 years it is 17th, and over the last 5 years it is 123rd.  Ouch.
 
How About Income Investors?
 
We analysed this angle here (The Income Aristocrats) and concluded that there were better funds for income generation but that the fund was nonetheless impressive, over 10 years, for total return – but this was only comparing with other equity income funds, not also growth funds – and ignored a tendency for performance to slip in the last 5 years.
 
In summary on past performance, even if you believe Woodford has god-like qualities, you can’t buy past performance.  It is gone.  
 
So what might drive the performance of this new fund in the years just ahead, in fact of any new fund?
 
What Performance Can You Expect?
 
The performance of a new fund in the first 12-24 months is typically driven by luck rather than the skill of the fund manager, even if it is Neil Woodford.
 
Why? Because the accident of when the fund is launched drives early performance; and, if we are honest, none of us, not even Neil, knows what will drive markets in that period.  
 
Will the Woodford style be a positive or negative over the next 12-24 months?  No one knows – sidestep anyone who says they do!
 
So what DO we know? And what are the most likely scenarios?
  • In US equities over-valuation, complacency, and cheap money have created a state of instability
  • No one knows the timing of when the market will fall and correct this situation (as with the final single snowflake which causes an avalanche)…
  • But history informs us that these conditions, on average, lead to falls nudging 50%
  • The UK and other developed markets cannot escape if (when?) such falls occur
 
Three Scenarios For Woodford
 
The above means that in the next 12-24 months Woodford will be hailed as a hero or pilloried based on the accident of the timing of the launch.
 
We see three broad scenarios:
  • Scenario 1.  The market going sideways for a couple of years. Perhaps he’ll get a boost from M&A in favoured sectors.  Performance will be dull though positive
  • Scenario 2.  The market falls sharply.  His fund will lose money but not as much as most of his peers
  • Scenario 3.  The market continues to make solid progress, as a minimum.  This fund will tend to underperform most peers
Should You Buy a New Fund?
 
Our view is that buying new launches is mostly pointless unless the fund is unique, for example providing access to an asset class or strategy not available elsewhere – this fund doesn’t meet either of those criteria.  So we would wait at least 6 months before considering the fund, and then begin to compare the actual performance with the many alternatives.
 
In the meantime, there are plenty of outstanding alternatives, in fact 122 better funds if you are investing for growth (based on the last 5 years of performance).
 
Will YOU Buy This New Fund?
 
Despite these reservation of ours, many Woodford fans will buy the fund, plus a phalanx of others seduced by a shiny new fund and compelling marketing, but little else of relevance to whether this is likely to be a good, bad, or indifferent investment. That will be enough to make this one of the biggest fund launches ever.
 
The Cult of The Fund Manager remains intact, even if very silly.
 
ACTION FOR INVESTORS
 
Why buy a new fund with no track record when you can buy an existing fund with an established track record?
 
Say “thank you but no thank you” to the wall to wall marketing.
 
FURTHER READING
Topic: Fund analysis


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