Comment: Investors wary as star fund manager departs

A STAR is gone. Neil Woodford, the UK’s most popular and powerful fund manager, who built Invesco Perpetual Income into an £11 billion colossus, is leaving after 25 years to set up his own.

Bill Jamieson

Cue a sharp drop in the shares of the Invesco Perpetual Income Trust, and Edinburgh Investment Trust, where Woodford is also manager. Shares in the latter tumbled 10 per cent last week on the news. And across the IFA and fund manager world the talk has been of little else. So, should investors sell up and move on?

For those minded to see all this as a storm in a stock market tea cup, here is why Woodford has become the UK’s star manager and why his departure matters. His track record has been stunning. His two unit trusts have taken first and second spot in the highly popular UK equity income sector over ten years. During this period, the High Income fund has grown investors’ money by 230 per cent and the Income fund by 224 per cent.

His achievement is best shown in the 25-year performance of the Income fund. It has generated a total return of 1,688 per cent since he took over, against 669 per cent from the average UK equity income fund. Little wonder why his departure – set for next April – has caused such a stir.

It has been fashionable of late to decry active investment management – or, more accurately, the management fees and charges levied by managed funds – and to argue that low-cost index tracker funds do just as well. But the examples of Woodford and others testify to the fact that investment management can make a very big difference indeed to investment returns. And this highlights is the increasing polarisation of the retail fund sector between the low-cost value end – index tracker and exchange-traded funds and the well-managed and successful funds on the other.

So, what has been the key to Woodford’s astonishing success and what should his followers now do? An outstanding feature of his management style is his consistency. He adopted a strategy of investing in companies with balance sheet strength and solid dividend-paying capacity, and he stuck to this through all the changes in fashion, and the dramatic ups and downs of the stock market, over his tenure.

In the 1990s, Woodford was reputed to have almost lost his job for sticking with his dividend-focused approach and refusing to buy into the dotcom boom. When boom turned to bust in 2000, Invesco Perpetual Income soared in popularity. He was similarly cautious about the banking sector and his funds were only lightly exposed to bank shares when the crisis broke in 2008.

Success at Edinburgh, which he took over from Fidelity in 2008, has been more modest. Shareholders’ funds have still to regain the peaks of 2006-07, and it still has borrowings of £200 million, though gearing is down from a peak of 31 per cent to 17.6 per cent.

A familiar list of FTSE 100 megastocks dominates the top ten holdings of this £1.1bn “conviction” portfolio. Pharmaceutical companies account for 25 per cent and there are big holdings in BAT, BT, Imperial Group and Reckitt Benckiser. But there are some notable absences, too – Woodford has sold out its holding in Vodafone, and cut its holding in BG; big, gutsy decisions that single him out from the herd.

My advice for now would be to stick with the trust and the income funds while the board deliberates on a permanent successor. Management in the meantime will pass to Mark Barnett, who has worked with Woodford for nearly 20 years, so I do not see any dramatic change of approach.

As for future investment, the sharp share price falls in the Woodford-managed investment trusts are a reminder of the need for investors to be cautious in piling in when investment trust shares are standing at a premium to net assets. The presence of a discount does not in itself justify buying shares in a trust. Other considerations matter a great deal – the calibre of its managers, the investment philosophy and approach, the performance record, and not least consistency of dividend payment.

But investors need to keep up a constant scrutiny for value. Merchants Trust on a 2.1 per cent discount is yielding 4.6 per cent and JP Morgan Claverhouse on a discount of 5.3 per cent yielding 3.6 per cent are among those offering value appeal.