8th December 2014
Last week marked six months since the Woodford Equity Income fund opened its doors to investors.
Below Laith Khalaf, senior analyst at fund broker Hargreaves Lansdown assesses how the fund has done since launch, and analyses the long-term performance of its star Neil Woodford, alongside that of his successor at Invesco Perpetual, Mark Barnett.
Woodford Equity Income was one of the biggest fund launches in recent years, and while it is still early days, the fund is flying high in terms of performance, and now has almost £4bn under management after just six months.
There were those who wrote Woodford off when he launched his new offering, on the basis the fund had no track record. This totally neglects the fact that in a fund like this, the manager’s skill is the most important consideration for investors.
Woodford’s successor at Invesco Perpetual, Mark Barnett, has also been doing an exceptional job with the Income and High Income funds. These two managers have led the pack over the last six months; Woodford claims top spot as the best-performing UK Equity Income manager, and Barnett is hot on his heels in third place.’
Woodford’s fund has got off to a flying start, returning 7.4% since launch, making it the top performing UK Equity Income fund over this period. For comparison the FTSE All Share has returned -0.5% and the average UK Equity Income fund has returned 0.7%.
Meanwhile his successor at Invesco Perpetual, Mark Barnett, has also been flying high- returning 4.7% over the same period, making the fund the third best performing UK equity income fund.
Both managers have posted significant outperformance, with Woodford coming out on top so far. However six months is an extremely short time to judge performance, so we need to look back a lot further to get a better idea of just how successful these managers have been.
Head to head: Barnett and Woodford
Barnett started running the Invesco Perpetual UK Strategic Income fund in January 2006, since which time, Barnett has returned 126.3% for investors. Over the same period Woodford has returned 119.4%, the FTSE All-Share has returned 66.4% and the IMA UK Equity income sector has returned 58.2%.
Both managers have therefore significantly outperformed the UK market and their peers. Over this period, Barnett has just got the upper hand, though it is probably only fair to point out that for most of this period he was managing a much smaller amount of money which would have given him greater flexibility.
Stepping back a bit further on Woodford’s track record, since 1988 he has returned 2,382% for investors, compared to 848% from the FTSE All-Share. To put this in simpler terms, for each £1,000 invested, Woodford has turned this into £24,820 compared to £9,480 from the UK stock market.
Both Woodford and Barnett can let their fund performance do the talking. They have delivered significant outperformance for investors over both the short and long term. Woodford has the longer track record, but our analysis suggests both managers are very capable of adding value through skill, not just luck.
Investment style – the similarities
Both managers have a similar investment approach, which is unsurprising given the amount of time they have spent managing money side by side. Both use a combination of top down and bottom up analysis. That is to say they consider the big macro-economic picture and how this will affect stocks and sectors, as well as undertaking fundamental company analysis.
The outperformance of both managers is largely down to their sector calls, according to our analysis. For instance Woodford shunned tech stocks and banks, shortly before the tech crash and banking crisis respectively, he has also been overweight pharmaceuticals for a number of years which has boosted returns of late.
The similar approach of both managers leads to overlap between the two funds, indeed nine of the top 10 holdings of each fund are shared, though the weightings differ.
At a sector level there is some alignment of interests too, as both funds are overweight and underweight the same sectors, though again weightings differ. Both managers are heavily overweight healthcare. Likewise they are both heavily underweight financials and oil and gas companies.
Both managers are happy to look overseas for opportunities, with both holding close to the maximum 20% allocation to non-UK stocks. The Swiss pharmaceutical company Roche, for instance is a top 10 holding for both Woodford and Barnett.
Investment style – the differences
Despite the similarities, there are subtle differences in the way these managers run money. Barnett has a pretty big active position on healthcare stocks, with a quarter of his fund invested in these companies, compared to a weighting of 8.5% in the FTSE All Share. However Woodford has gone even further, with a third of his fund invested in the healthcare sector. We believe this indicates Woodford has a propensity to take bigger sector positions.
Likewise Woodford’s biggest holding, AstraZeneca, is 7.51% of his portfolio, whereas Barnett’s biggest holding, British American Tobacco, makes up 5.55% of his fund. Woodford actually holds four stocks with a weighting higher than this- AstraZeneca (7.51%), GlaxoSmithKline (6.37%), British American Tobacco (6.2%), Imperial Tobacco (6.2%). Again we believe this suggests Woodford runs the more concentrated portfolio at a stock level.
Of course, the more concentrated a portfolio, the greater the risk if the manager gets things wrong, but also the greater the potential for outperformance if they get it right.
A further difference between the two managers lies in Woodford’s practice of investing in small unquoted companies. We expect Barnett to be more inclined to spend time and resources on the bigger portfolio holdings, rather than researching these small caps.
Woodford is now managing a smaller amount of money than Barnett. Woodford is currently managing around £8bn, while Barnett is running in excess of £20bn, which is a more challenging task.
Somewhat bizarrely, the funds sit in different sectors. Woodford Equity Income sits in the UK Equity Income sector. Invesco Perpetual Income and High Income funds sit in the UK All Companies sector because their yield was not sufficient to stay within UK Equity Income sector. This is due to calculation rules which in our view penalise managers who grow their capital as fast or faster than their dividends, or indeed faster than the FTSE benchmark.
Both Woodford and Barnett are total return managers who don’t invest in stocks just because they have a high yield. We would therefore encourage investors to put the differing sector classifications to one side and treat both their offerings as UK Equity Income funds.