The increasing complexity of investing and the search for suitable funds can be a full-time task. When conducting our search for new funds we focus on both the bigger picture and the finer details in our drive to meet the individual needs of investors in today’s ever changing world.
An important part of this research process is meeting face to face with fund representatives so, last Tuesday, we met with Kristian Penttila from Woodford Investment Management to discuss their Equity Income fund. We do not currently hold this fund within our portfolios but it has been on our radar since its establishment in June of last year so we were eager to meet Kristian to find out how the team feel it is doing.
Our keen interest in this fund is mainly due to the manager. Neil Woodford is one of the most respected, skilled and well-known fund managers in the UK. He was an essential part of the UK equities team at Invesco Perpetual for more than 26 years, but left the company in October 2013 to set up his own fund management business- Woodford Investment Management.
Woodford takes a long-term macro-economic outlook to his investments which are heavily tilted toward big blue-chip stocks such as pharmaceutical and tobacco firms. He has avoided investing in oil or banking, whose volatility has hindered the markets in recent years. Instead the experienced manager is driven by his search for value and holds some 5% of the fund in “undiscovered” businesses. His confidence in the long term future growth of these businesses has the potential for creating some impressive returns.
But will it pay to be patient? Neil Woodford’s methodical, valuation-oriented style had consistently delivered outstanding performance while working at Invesco perpetual. Although only time will tell if the same level of success can be achieved at Woodford, they have had an impressive first year having exceeded the sector average by 10% with very low volatility (a Beta of only 0.42.) according to their own fact sheet.
The team are adamant not to just copy the FTSE 100 benchmark index when selecting their funds. Kristian commented: ‘we invest in a company only when we are convinced of the compelling long-term opportunity- we will not invest in stocks just to make our funds look more like the market’. Some would argue that the short term success has been achieved by the luck of good markets rather than skill but, as Kristian explained, they feel the market is ‘pregnant with risk’ and try to avoid looking or behaving like the market.
Low volatility along-side good returns is of particular importance at the moment as there is something very strange going on in the financial world. As many of our clients are aware, we hold a fair percentage of bonds (fixed interest securities) in our more cautious portfolios. Bond are considered to be ‘safer’ investments because of their historically lower volatility and the rules that govern them.
The guaranteed fixed rate return on bonds gives an investor security when interest rates are falling. This has made bonds popular and (many would argue) expensive. Our great concern is the threat of an interest rate rise by any of the major Central Banks such as the Federal Reserve in the U.S. We are not alone in thinking this way.
The result of very high bond prices is very low bond ‘yields’. This means that the underlying bond price is extremely high and sensitive to an increase in interest rates whilst the interest paid by the bond is extremely low. As a result, many investors have moved from bonds to high dividend Equities (shares). These shares are often more defensive and cautious in their nature and so resultantly those prices have also become extremely inflated within the past 18 months.
A recent article issued by Mitchell Fraser-Jones of the Woodford team points out the danger of investing in a ‘Bond Proxy’ holding such as overpriced shares that pay high dividends. The Woodford team aren’t necessarily calling a bond bubble about to burst – but their mature approach to navigating the current Equity market with one eye on the Bond story is fascinating.
To this end the Woodford Equity Income fund is of interest to us and it could have the potential to make it into our ‘Thomas and Thomas’ portfolio in the near future.
As always – we are here for you if you have any questions or concerns. This article is not a recommendation to buy the fund. Please see warnings.