Woodford/fund management: doom loop

Neil Woodford is seen as a value investor. These fundamentalists despise flighty momentum investors, who pile in or out of shares whose fortunes are waxing and waning. So it is ironic that another kind of momentum may prove the undoing of the UK’s best-known investor. Fans who stampeded into his funds when he set up independently in 2014 are bailing out wholesale. Unless performance improves, the self-reinforcing trend will be irreversible.

The size of the flagship Woodford equity income fund has dropped two-thirds from its £10.2bn peak two years ago. It has shrunk by £560m in less than four weeks, with more than half the outflows after rating agency Morningstar downgraded the fund. In March, Mr Woodford made a light-hearted comment about being “out of business in about two-and-a-half years” if withdrawals are not stemmed. No one is laughing now.

Mr Woodford is vulnerable to negative momentum for three reasons. First, he likes taking stakes in unquoted companies. It is tough to sell these profitably and quickly to meet redemptions from the open-ended equity income fund. Second, Mr Woodford has large “conviction” positions in businesses such as struggling lender Provident Financial. Short sellers are targeting these companies, reckoning he may be forced to dump his positions.

Third, Mr Woodford’s fortunes pivot on the loyalty of St James’s Place. Backing from the savings business gave him a flying start when he left Invesco. It accounts for more than a third of his £10bn of assets in total. It has issued a statement of support. But its own share price is under pressure. A king maker can become a king breaker.

Earlier this month, Hargreaves Lansdown said it would keep the fund on its “Wealth 50” of recommended funds. Supporters sustain a belief that a value-based investing style, deeply out of favour, is due a revival. Mr Woodford’s luck turned after previous periods of underperformance when the dotcom bubble burst and the financial crisis hit.

He desperately needs another bounceback. But the fund is down 8.25 per cent in the last month. Critics say his clear defensive style has become quirky and confused. In his heyday, Mr Woodford was the man no one would bet against. Now that fund industry momentum has turned against him, it is the common pursuit.

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