Woodford Concerns

Moe_The_Bartender

And now Woody's mate Barnett gets downgraded by Morningstar. From Citywire

Morningstar has downgraded Mark Barnett’s Invesco Income and High Income, flagging concerns over the £8.9 billion funds’ heavy weighting to smaller companies.

The investment research group has downgraded its rating on the funds from ‘bronze’ to ‘neutral’ across most of the funds’ share classes, cutting its rating to ‘negative’ on the more expensive options.

Associate director Peter Brunt highlighted the funds’ ‘sizeable overweight’ in small and micro-cap companies, at over 30% of the portfolios, saying they could pose problems for Barnett in funding withdrawals from investors. In this year alone investors have pulled £1.7 billion from the two funds.

‘While the group has been able to meet redemptions so far, Barnett’s continued intent on investing in smaller names gives us cause for concern,’ he said.

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‘Such a shift in market-cap profile for a strategy with sizeable assets has made the overall liquidity profile less attractive and has resulted in significant ownership of many smaller names.’

A spokeswoman for Invesco said there had been ‘no change in our objectives or style in managing these funds’.

‘We maintain our focus to seek value in UK companies,’ she said.

‘Given the best performing stocks have been largely the mega-cap internationally orientated names and that more domestic stocks have underperformed, this may give the appearance of a style drift but this is not the case.

‘More than 80% of the Invesco UK equity income funds is invested in businesses with a market cap of over £500 million and over two-thirds is invested in companies with a market cap of over £1 billion.’

Brunt also questioned Barnett’s skill-set as an investor in early-stage smaller businesses. ‘An increasing number of stock-specific issues, notably among smaller, less proven businesses, in recent years has raised concern over the depth of fundamental analysis and focus on risk,’ he said.

‘Barnett has significantly increased the focus on small caps and micro-caps in the portfolios under his management, the research for many of which he is undertaking himself. We do not believe that this plays to his strengths, which we consider to be among larger and mid-size companies.’

Morningstar’s downgrade echoes that for Neil Woodford’s £3.1 billion Woodford Equity Income fund, which is set to be wound up after dealing was suspended in June.

Brunt downgraded his rating on the fund run by Barnett’s former mentor from ‘bronze’ to ‘neutral’ in May, though he employed stronger language, arguing Woodford’s ‘relentless willingness to push the portfolio to its liquidity limit’ had resulted in ‘extreme positioning’.

That sparked a big rise in withdrawals from Woodford’s fund with £150 million pulled in the space of three weeks, though it took Kent County Council’s attempt to pull its £250 million investment three weeks later to spark the fund’s suspension.

The Invesco Income and High Income funds, which Barnett inherited from Woodford in 2014, sit in the bottom five of the 215-strong Investment Association UK All Companies sector over five years, up just 6.5% and 7.4% respectively.

‘The increased focus on domestic stocks has proved a headwind, as the market has shunned them over Brexit uncertainty, but this does not explain the extent of the underperformance: the strategy has suffered from a high number of stock-specific problems,’ he added.

‘While contrarian investing often involves an element of risk, the nature of some of the issues, including among small caps and micro-caps, has raised concerns over Barnett's implementation of the approach.’

He added that Barnett's strategy, which had traditionally performed better than those of peers when markets were falling, had lacked that defensive appeal last year, when problem stocks Stobart (STOB), Capita (CPI) and IP Group (IPO) weighed on the funds.

Brian65

talexuser wrote: »

I cannot understand how HL continued to support it after it became clear it would never be able to recoup the losses to be in top quarter 5 year figures and other intermediaries were giving sell notices. HL were effectively saying ignore much better performing funds and hope that somehow a normal income fund will magically outperform better income funds by eventual huge stock price increases rather than the dividends all were getting anyway.

They said Woodford had been through periods of underperformance before, but had always come good. The last thing they wanted to do was issue a sell notice the week before it recovered. Make of that what you will. I suppose you could say Mark Dampier wanted to keep the party going as long as possible because he had praised Woodford so much that when Woodford was finished, Dampier was finished too.

fronty

It's going to be interesting to see how this plays out, is anyone here joining the class action?...

https://www.thisismoney.co.uk/money/investing/article-7667927/1-000-reasons-fund-manager-Neil-Woodford-heading-judgement-day-court.html

Moe_The_Bartender

fronty wrote: »

It's going to be interesting to see how this plays out, is anyone here joining the class action?...

https://www.thisismoney.co.uk/money/investing/article-7667927/1-000-reasons-fund-manager-Neil-Woodford-heading-judgement-day-court.html

I struggle to find sympathy with those who went ahead and invested in Woodford funds given all the warnings. You lost. Get over it.

talexuser

I agree an action against Woodford is bound to fail, since everyone knows funds go up and down. Perhaps digressing from income might work, but if the terms give him carte blanche in choices, no chance.

However a target of HL and there is a case to answer, since advertising the Wealth 50 as our favourite funds, having crunched the numbers, decades of experience, thousands of hours investigating, a robust process etc etc, and puffing "no commision criteria" when his discount gave them an enormous financial interest in Woodford funds... now they say they were concerned over a year ago, in that case you put a don't buy, hold or even sell notice out, which they did not do up to the day it ws forced to close.

They say important info this is not personal advice, ok, but then they have an "enviable track record". :rotfl:

green_man

talexuser wrote: »

I agree an action against Woodford is bound to fail, since everyone knows funds go up and down. Perhaps digressing from income might work, but if the terms give him carte blanche in choices, no chance.

However a target of HL and there is a case to answer, since advertising the Wealth 50 as our favourite funds, having crunched the numbers, decades of experience, thousands of hours investigating, a robust process etc etc, and puffing "no commision criteria" when his discount gave them an enormous financial interest in Woodford funds... now they say they were concerned over a year ago, in that case you put a don't buy, hold or even sell notice out, which they did not do up to the day it ws forced to close.

They say important info this is not personal advice, ok, but then they have an "enviable track record". :rotfl:

I agree with this. I think an action against HL at least has some merit and can’t be dismissed out of hand. There were a number of non subjective elements to the Woodford fund that should of at least merited a warning in the HL literature.

jimjames

fronty wrote: »

It's going to be interesting to see how this plays out, is anyone here joining the class action?...

https://www.thisismoney.co.uk/money/investing/article-7667927/1-000-reasons-fund-manager-Neil-Woodford-heading-judgement-day-court.html

Reading some of those comments it seems that some people have no idea of the risk of equity investments when they say that the drop in value has affected them. Yes this was due to the manager but the kind of percentages are the sort of amounts you'd expect to happen every few years anyway.

bowlhead99

jimjames wrote: »

Reading some of those comments it seems that some people have no idea of the risk of equity investments when they say that the drop in value has affected them. Yes this was due to the manager but the kind of percentages are the sort of amounts you'd expect to happen every few years anyway.

Yes, although the issue they are facing is:

It's fine to drop 30-50% on your equity fund when there's a crash - we all know this can happen - when in the years leading up to it the sun has been shining and you've been making a lot of hay. However, due to the Woodford debacle people haven't been making lots of hay, not even a little bale over the last two years - but instead some sizeable losses. So when they get their money back and stick it in another fund in the hope of making their money back, they still have the inevitable broader market crash to come.

Still, some of it is just tabloid journalism milking a story. For example:

John, 75, a former IT salesman, says they are ‘terrified’ of losing their money. He adds: ‘We appreciate that stock markets involve risk, but never did we believe that Equity Income would effectively go into liquidation.’
...
'Yes, our £20,000 investment may not be huge by some standards, but to us the losses we are going to crystallise are life changing – losses we will find impossible to recover, given we are both in our seventies.’

If the guy is literally terrified, perhaps the ethical thing to do is for the daily mail journalist to remind him that he is not going to lose all his money and a liquidation of a £3bn investment fund is quite different to when an individual company goes into liquidation and winds up with the creditors getting everything and shareholders getting nothing back.

The fund has over 80p net assets per share according to Friday's valuation (depending on which share class you are in) and most of it is in liquid assets and cash. Some of the illiquid stuff will probably return nothing (but is only a small part of the portfolio) while other illiquid stuff will be sold off at what according to recent press comment was being negotiated at a mild discount to its current NAV. So investors will get most of the 80p back. The guy who invested £20,000 is not going to lose his £20,000 and the claim that at his age he'll never be able to make back his losses seems overblown.

I do agree with you jimjames that if losing a portion of your £20,000 is going to be a lifechanging event from which you can never recover, you shouldn't put all your £20,000 in one specialist 100% equities fund.

Here is another quote from 'a 67-year-old retired carpet estimator, invested £13,000 in Equity Income via Hargreaves Lansdown'

He says: ‘I invested in Woodford when he was running funds for Invesco Perpetual in the 1990s and 2000s. He made me a few quid. So when he launched Woodford Equity Income, I had no problem in backing him.’

He adds: ‘What annoys me is that at no stage did Hargreaves Lansdown alert me to the fact that Equity Income’s portfolio was no longer living up to the fund’s title and investing in dividend-focused UK companies.

'Instead, it was heavily invested in illiquid, often unquoted, stocks. If I had known this, I would have got out. Yet Hargreaves Lansdown seemed more interested in selling more and more of Woodford.’

So, this guy is someone who had previously invested in Woodford and 'made a few quid' which may literally be just a few quid but quite possibly an embarrassment of riches given Woodford's rates of returns compared to the wider markets in the 90s and 2000s. He had no problem putting more into Woodford because he was greedy for more of the same. He won't be destitute after his Woodford losses, as he only put £13000 in and he has a broader portfolio beyond that fund - the article goes on to say he's moving the rest of his investments from HL to AJBell.

He contacted the law firm and his main gripe seems to be that at no point did HL alert him that it was no longer preferring dividend focused stocks. Instead, it heavily invested in illiquid, often unquoted, stocks and if he had known he would have got out. So he wants some compo and hopes the law firm will help him get it.

However if you fact check his assertion by looking at HL's "research", this is what they were saying at https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/l/lf-woodford-equity-income-accumulation/research back in January 2018, based on the archiving at archive.org.

In this fund Neil Woodford blends investments in larger, high-yielding companies with higher-risk smaller, more innovative businesses. The smaller businesses, which include those not yet listed on the stock market (unquoted companies) are included to provide long term growth potential, while the larger companies provide the majority of the fund's income. The fund does not have a strict income target. Neil Woodford seeks to produce a good total return, combining both rising income and capital growth. This means he will sacrifice some income upfront for the prospect of better growth in the capital and income over the long term. Of course there are no guarantees and we view this as a higher-risk UK equity income fund.

Anyone reading that wouldn't fail to conclude that the income it produced came from established companies and the growth was to come from smaller businesses including unlisted businesses, and it didn't have a strict income target and it was viewed as a higher risk fund.

Poor retired carpet estimator didn't read HL's research that was sitting on their site literally 18 months before it was gated - telling him that it was a higher risk fund without a strict income target, and was instead one that sacrificed up-front income for longer term potential and holding unlisted stock. Or perhaps he read it and didn't care but has now conveniently forgotten that he read it.

So now he wants to sue them for failing to tell him that it wasn't a conventional income fund and that it held unlisted stock etc, because he would definitely have sold out of it if only he'd known. What a crock of crap. With an internet connection access to the HL website virtually 24/7 and their comments which I quoted above sat there for at least 500 days before the fund was frozen.

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To be fair, they have not always flagged it as a 'higher risk' fund and in the early days they noted his typically defensive style, with the example of avoiding banks in the run up to the 2007 crash. Still, if I check the archive from two years ago, their page mentioned:

"The manager will invest in companies of all sizes across the UK market including unlisted businesses."

"Neil Woodford seeks to add value by investing in out-of-favour companies for the long term. He is not interested in investing for short-term profit."

"After setting up his own fund management business in May 2014, we believe he is well incentivised to perform. However, there is no guarantee he will repeat his previous successes"

"At times the manager has taken significant stock or sector bets, leading to the fund performing quite differently to the benchmark"

You can't read that and expect that all the investing will be done in large listed companies that you've heard of, which are all doing well and well respected by the market, and that you'll make positive returns in the short term, or that there are any guarantees that he'll keep on beating the rest of the UK All Companies sector as he did in 2014-16. Unfortunately people seem to have been shocked that the conviction driven 'in it for the long term' style to which they signed up did not produce good short term results in 2017 or 2018, so they started dumping the fund.

The gating was to protect the remaining investors from carrying an increasing proportion of the less-liquid assets which were intended to be held for the long term. It's probably fair to say that the retired carpet man doesn't think much of this 'protection'. But as he doesn't properly read the narratives put out by HL he would probably not have taken any action at all to drop the fund if left to his own devices, so he could have been the last man standing and facing a larger loss, without Link's action to freeze redemptions.

[Deleted User]

bowlhead99 wrote: »

yadda yadda..he's moving the rest of his investments from HL to AJBell..yadda yadda

Good post..

talexuser

Barnett defends his 4th quartile performance over 1, 3 and 5 years here

https://www.trustnet.com/news/7460567/invescos-barnett-come-to-me-if-you-want-reliable-income?utm_source=Trustnet%20Newsletters&utm_campaign=c23222f35d-EMAIL_CAMPAIGN_2019_11_11_01_18_COPY_01&utm_medium=email&utm_term=0_2314bd04ee-c23222f35d-76889477

basically comes down to "I don't have the same stocks as Woodford" so that's dandy then.