Woodford Concerns

ffacoffipawb

Moe_The_Bartender wrote: »

Update from Citywire:

Neil Woodford has lost an estimated £113 million from writedowns to Woodford Equity Income's heavy holdings in unquoted companies since the turn of the year, amid scrutiny of the valuations employed by the suspended fund.

Actually it is the investors in the fund that have lost £113 million, not Neil Woodford.

Moe_The_Bartender

Prism wrote: »

That type of attitude is part and parcel of being a value focused investor. You have to believe that you are right and everyone else is wrong (or doesn't know any better). I'm not convinced that approach well ever work again except for investing in small, unresearched companies - which admittedly is what he was trying to do, but in the wrong type of fund - oh and he doesn't seem especially good at it either.

Value investing doesn’t work any more. There’s too much information available these days for anyone to have an edge which is why funds like M&G Recovery have been going backwards and part of the reason why Woodford has come unstuck.

dividendhero

Prism wrote: »

You have to believe that you are right and everyone else is wrong (or doesn't know any better).

Likewise with regard to Industrial Heat, Woodford must think all the worlds nuclear physicists got it wrong but Woodford knows better:mad:

Scarpacci

Moe_The_Bartender wrote: »

Value investing doesn’t work any more. There’s too much information available these days for anyone to have an edge which is why funds like M&G Recovery have been going backwards and part of the reason why Woodford has come unstuck.

I need to read more of the studies on value investing as my own view is people might have conflated the higher expected returns from buying stocks when the market, overall, is cheap and buying the cheapest stocks at any moment in time.

The latter seems likely to deliver a portfolio of failing companies which remain cheap. That seems to be how Woodford ended up with so many corporate disasters (Provident, Kier, etc).

Moe_The_Bartender

Of course, something that is cheap may not be good value and vice versa.

Reaper

Moe_The_Bartender wrote: »

Value investing doesn’t work any more. There’s too much information available these days for anyone to have an edge which is why funds like M&G Recovery have been going backwards and part of the reason why Woodford has come unstuck.

I don't share the view Value investing is over. True it has been out of favour for a long time and Growth stocks have dominated. Investors have been willing to bet Amazon, Google etc will keep growing and eventually justify their high prices.

To take a simple measure there is the classic Price/Earnings or P/E. You take the market price per share and divide by the earnings per share to give you a measure of how cheap or expensive a stock is i.e. whether it is good value

In the UK the FTSE All Share currently averages a PE Ratio of 16. Look at Amazon with a PE ratio over 70 and you start to realise if their growth were to level off the share price could very easily have a crisis. At some point I expect Growth to fall out of favour and Value to make a reappearance, but I can't predict when.

itwasntme001

Reaper wrote: »

I don't share the view Value investing is over. True it has been out of favour for a long time and Growth stocks have dominated. Investors have been willing to bet Amazon, Google etc will keep growing and eventually justify their high prices.

To take a simple measure there is the classic Price/Earnings or P/E. You take the market price per share and divide by the earnings per share to give you a measure of how cheap or expensive a stock is i.e. whether it is good value

In the UK the FTSE All Share currently averages a PE Ratio of 16. Look at Amazon with a PE ratio over 70 and you start to realise if their growth were to level off the share price could very easily have a crisis. At some point I expect Growth to fall out of favour and Value to make a reappearance, but I can't predict when.

PE alone does not tell you anything about whether value is good or bad. As you are trying to mention, it is about future expected earnings and how they grow. PE is just looking ahead one year and does not tell you about future expected earnings growth.


Value investors typically buy companies that have stable earnings (no growth expected) and which have a low PE. Some may very well be great value but there will be some that even at low PE ratios are eventually bought too expensive in hindsight.


You can get burnt either way buying value or growth companies. And both types of stocks can make money in any part of the economic cycle. What tends to happen is that during late-cycles, growth stocks under-perform value as growth stocks are more likely to be sensitive to slow-downs/recessions. Note this does not mean all growth stocks under-perform, only on average they do.

Reaper

Yes indeed. I was using a very simple definition of value to illustrate a point. Naturally a value investor looks for more than just P/E

Many of my investments are in growth but it is a position I am increasingly uncomfortable with.

MaxiRobriguez

In a slowing growth environment a lot of people are going to find that companies with a 5-8% dividend yield are suddenly very attractive.

bowlhead99

MaxiRobriguez wrote: »

In a slowing growth environment a lot of people are going to find that companies with a 5-8% dividend yield are suddenly very attractive.

Well, I supposed that's just like how in a low interest rate environment, companies with that reliable 3- 5% dividend yield (there are not really any at 8% without big risks) have already been 'suddenly very attractive' when bonds stopped offering decent yields.

As growth slows, and equity valuations fall, the trillions of investor capital which has temporarily been using income-paying equities as a bond substitute will bail, as it becomes clear that the party is over and 'value equities' don't have the downside protection of fixed income. It's not clear that there will be enough people wanting to move from the Amazons and Alphabets into the (e.g.) tobacco or energy companies which they find 'suddenly very attractive', to compensate for those who are abandoning the dividend stocks - finding such holdings 'suddenly unattractive' by comparison to fixed interest opportunities.

Dividend paying stocks don't make the headlines as much as growth stocks in recent years, but QE and declining returns from bonds have certainly helped their valuations come on a lot considering the perhaps limited growth prospects and how they don't all expect huge demand increases from month to month when the good times roll. For example my holding in first state global listed infrastructure has basically doubled in last five years and is up over 260% in ten - a fund that holds somewhat boring energy companies, railways, communications infrastructure etc. It doesn't now have the same 'downside protection' as some would have thought it offered at the start of the cycle.