Bill Jamieson: Troubled times for fund manager Neil Woodford

'Did these top fund managers fall victim to group-think?' asks Bill Jamieson. Picture: Daniel Leal-Olivas/AFP/Getty Images

His mammoth Woodford Equity Income fund – £9.2 billion but not all that long ago in excess of £10bn – has been a major casualty of the collapse in the shares of doorstep lender Provident Financial.

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Woodford’s Equity Income fund was one of the biggest investors and just a month ago it was its fourth-largest holding, accounting for 4.2 per cent of the portfolio. Shares in Provident Financial slumped 67 per cent after it announced the departure of chief executive Peter Crook, scrapped its dividend and revealed a Financial Conduct Authority probe into its repayment option plan product, as it delivered its second profit warning in two months.

But Woodford was not the only big fund manager to be hit. Fund groups Invesco Perpetual and Woodford Investment Management held between them 40 per cent of the company and suffered losses of £377 million and £318m respectively before a modest rally by the end of the week.

Mark Barnett, Woodford’s successor at Invesco Perpetual, was another big backer, with the stock the sixth-largest holding in both his £10.9bn Invesco Perpetual High Income and £5.4bn Income Fund, accounting for 2.8 per cent of both.

Barnett also holds 3.1 per cent of the £1.8bn Edinburgh Investment Trust in the stock, with shares in the trust dipping 1.2 per cent when the news broke.

The highest conviction backer was Alexander Darwall, holding 5.7 per cent of his Jupiter European Opportunities investment trust in Provident Financial. Shares in the trust fell 1.7 per cent.

Did these top fund managers fall victim to group-think? It may be that Provident Financial was for long an attractive income stock, albeit with the risks that come with lending in a vulnerable area. But why was there a general consensus at the top that these risks were containable and could be discounted?

Woodford is hopeful that the initial market reaction has been overdone and that the Provident Financial business will in time recover. It should still deliver, he believes, more than £300m of profit in 2019, equating to approximately 160p in earnings per share in 2019 and a price/earnings ratio of around three times.

But the FCA is examining sales between April 2014 and 2016, and Shore Capital analyst Gary Greenwood says there is a risk the regulator could expand its investigation to cover earlier periods. The departure of Crook is unlikely to be the only one and there are fears that the imbroglio could hit retail deposits.

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Meanwhile, other wobbly holdings have hit performance not only at the Equity Income fund but also at Woodford Patient Capital Investment Trust, which has quickly grown to £790m. The Equity Income fund is now second-bottom in the list of 85 UK equity income funds with a loss of 1.5 per cent over a year in which the sector rose by 10.8 per cent. Patient Capital is up just 4.1 per cent over 12 months, against an overall market gain of 16.3 per cent.

Woodford was a big backer of life sciences group Allied Minds, whose shares have fallen almost 75 per cent since December. Motor recovery group AA suffered a 36 per cent fall on news of the departure of executive chairman Bob Mackenzie. Shares in retailer Next have been hit by trading worries.

Capita also experienced a sharp reversal before a recent rally. Drug giant AstraZeneca, the biggest holding in the Woodford Equity Income fund, accounting for just over 8 per cent of the portfolio, suffered a 15 per cent fall on news that a key lung cancer drug had failed initial tests.

And third-largest holding Imperial Brands has weakened 20 per cent over the last 12 months on plans by the US Food & Drug Administration to cut the amount of nicotine permitted in cigarettes.

All this has shaken investor confidence in a fund manager after a stellar 30-year career. According to Hargreaves Lansdown, putting together his performance on the Invesco Perpetual High Income fund with his new flagship fund, a £10,000 investment in 1988 would have grown to £310,400 today. The same amount invested in the FTSE All-Share would have grown to £121,400.

This is by no means the end of the Woodford story. He has a proven acuity, some of these setbacks will recover and the search for long-term growth will continue.

But just as diversification is the watchword in portfolio selection, it applies equally to fund management – and investing across different skills and specialisms.

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