Woodford Equity Income

cogito

Prism wrote: »

Very different styles Woodford and Fundsmith so for me consideration would come when either that style is proving not to work or I believe that another fund is likely to do better. The first is hard to commit to admitedly (partly why Woodfrod funds are still so popular). The second reason is mainly guesswork.

So if I take Fundsmith for example, one of the main reasons that I hold it is to fall less than other equity funds during a downturn or crash. Now whether this actually happens I shall have to wait and see (and by that point its a bit late), but if it doesn't do what it says on the tin I shall have to consider what to do next time around. During the ittle bursts of volatility over the last year or two has down its job. It didn't exist during the last serious crash. After any such crash I would likely look for something a bit more aggresive to capture any growth surge (to run side by side with not replace), but almost impossible to time.

To get back to Woodford, its a really hard style to pull off consistently. Always looking for value stocks and sectors, buying at the right time, selling at the right time - exhausting! If you look back at Woodfords performance over the years its generally pretty poor with all the good stuff coming over a few small time periods. Thats exactly what I would expect for this kind of value investing. He has made some good calls (no tech during 2000, selling the banks just before the financial crisis etc) but how many times can that happen while not making a bunch of bad calls - feels too much like gambling to me.

I prefer a bit of consistency, in line pretty much with the index, while hopefully out performing it a little.

Good post. Fundsmith have backtested their portfolio to see how it would perform in a market downturn and the results were very reassuring. It has defensive qualities that are often overlooked.

In the case of Woodford which I happily got out of when I didn’t like his holdings in unquoted companies, he seems to be stuck with his 'value' approach. He knows much more that I do, but it seems to me that value investing in a long running bull market simply can’t work. And he's made some pretty awful calls lately.

Here's his latest blog.

https://woodfordfunds.com/words/blog/weif-portfolio-update/

aroominyork

cogito wrote: »

Good post. Fundsmith have backtested their portfolio to see how it would perform in a market downturn and the results were very reassuring. It has defensive qualities that are often overlooked.

What does that backtesting consist of? As a Fundsmith holder I am not especially interested in whether the portfolio, bought after the last serious downturn, would have proved resilient in that downturn. Of more interest would be an analysis of the possible reasons for the next downturn and to seek to demonstrate how resilient Fundsmith would be in each scenario.

Prism

aroominyork wrote: »

What does that backtesting consist of? As a Fundsmith holder I am not especially interested in whether the portfolio, bought after the last serious downturn, would have proved resilient in that downturn. Of more interest would be an analysis of the possible reasons for the next downturn and to seek to demonstrate how resilient Fundsmith would be in each scenario.

They have made no predications of what might happen in the future but have provided two examples of the past during the last two crashes. Using roughly the same companies as in the fund today (some were not listed back then), there was a drop of -12% (index was -46%) during the financial crisis and no drop during the dot.com crash and bear market. Those figures are also in line with the private pension fund Terry Smith was responsible for (although didn't manage I don't think)

No idea if the same happens next time but I am happy to hold a fund that invests in companies that survive those two events pretty easily.

bowlhead99

Prism wrote: »

They have made no predications of what might happen in the future but have provided two examples of the past during the last two crashes. Using roughly the same companies as in the fund today (some were not listed back then), there was a drop of -12% (index was -46%) during the financial crisis and no drop during the dot.com crash and bear market. Those figures are also in line with the private pension fund Terry Smith was responsible for (although didn't manage I don't think)

No idea if the same happens next time but I am happy to hold a fund that invests in companies that survive those two events pretty easily.

Smith's fund, per his April factsheet, put on a little over 88% between the start of Jan 2016 and the end of April 2019. So £100 invested including reinvestment of dividends became £188.

So if i the rising investment values reversed to where they were 3 and a bit years ago, there's a 40-50% value drop. Obviously if values retreated to where they were at end of 2015 you don't have to give back the dividends banked along the way, but the value of his investee companies back then were not at all time low economic depression prices, so 50% is possible, surely.

It's comforting that his current portfolio model didn't lose more than a few percent in the last couple of big crashes on a backtest basis, but he does not have a magic ratchet arrangement where his values only go flat or up and are limited to only going down a tiny bit. It's a concentrated portfolio of his favourite company types which he hopes will not give up a lot in a crash. But it's hope.

Prism

bowlhead99 wrote: »

Smith's fund, per his April factsheet, put on a little over 88% between the start of Jan 2016 and the end of April 2019. So £100 invested including reinvestment of dividends became £188.

So if i the rising investment values reversed to where they were 3 and a bit years ago, there's a 40-50% value drop. Obviously if values retreated to where they were at end of 2015 you don't have to give back the dividends banked along the way, but the value of his investee companies back then were not at all time low economic depression prices, so 50% is possible, surely.

I agree a 50% is entirely possible, but the main reason for the 88% growth over that time is not that those companies are more highly rated or popular but that their returns are significantly higher than in 2016. So if those companies reversed their earnings growth and some event caused a rerating of their value then sure. Worth mentioning though that almost the entire point of the selection process is to find companies that won't be affected by the stock market . I am sure there will be times of under peformance but I don't expect a crash to be one of those times.

It would be quite interesting to see what happens to the Woodford funds during a crash. On the face of it you wouldn't want to be invested in cyclical banks, REITS, biotech startups and insurance companies - many of those companies are already so lowly rated that I can't imagine there is too far to fall. Wouldn't want to risk it myself.

aroominyork

It is an interesting discussion between bowlhead and Prism. Is it a case of ‘the higher the climb, the harder they might fall’ or has the fund successfully picked companies whose increased earnings have reduced the level by which they might fall? Who knows, but I am thinking of moving a bit more of my Fundsmith into Smithson; if Terry (and his managers) have successfully picked established midcaps with low debt and which meet Fundsmith’s successfully implemented strategy based on ROCE, those companies might provide a little shelter if a storm initially hits large caps that have experienced high growth in recent years.

Prism

aroominyork wrote: »

It is an interesting discussion between bowlhead and Prism. Is it a case of ‘the higher the climb, the harder they might fall’ or has the fund successfully picked companies whose increased earnings have reduced the level by which they might fall? Who knows, but I am thinking of moving a bit more of my Fundsmith into Smithson; if Terry (and his managers) have successfully picked established midcaps with low debt and which meet Fundsmith’s successfully implemented strategy based on ROCE, those companies might provide a little shelter if a storm initially hits large caps that have experienced high growth in recent years.

I am sure its a bit of both to be honest and detailed company stats are beyond my understanding but for example if we take one measurement of Microsoft which Fundsmith holds...
31/3/2016 - PE 41, price $52
31/3/2019 - PE 35, price $118

Of course the unknown is how will Microsofts profitability be affected by whatever downturn comes next. I reckon they are in a better place than they were 10 years ago due to the way in which they currently make their money. I work with Microsoft but I shall leave all the other companies to Terry Smith.

coyrls

aroominyork wrote: »

if Terry (and his managers) have successfully picked established midcaps with low debt and which meet Fundsmith’s successfully implemented strategy based on ROCE,

I don't think Fundsmith's investments could be described as "midcaps".

aroominyork

coyrls wrote: »

I don't think Fundsmith's investments could be described as "midcaps".

I was talking about Smithson.

bostonerimus

cogito wrote: »

No it’s not. The only question they should be asking themselves is would they still buy at today's price. In the case of Fundsmith, the answer is 'yes'. In the case of Woodford, it's 'no'.

So that would preclude a holistic approach to rebalancing and asset allocation. There are arguments for just leaving everything alone and that's what I do, but in some circumstances the level of short term volatility or asset allocation creep that comes with that approach might not be desirable.