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Why The Share Centre is continuing to back Woodford

06 December 2017

Multi-manager Sheridan Admans explains why the firm is sticking by two of Neil Woodford’s funds after a recent run of poor performance and outflows.

By Rob Langston,

News editor, FE Trustnet

Neil Woodford’s ‘tried and tested’ investment process and long-term track record have convinced The Share Centre’s Sheridan Admans to add to existing exposure to CF Woodford Equity Income in his multi-manager portfolios.

Despite having recently reached the three-year performance milestone, Neil Woodford’s flagship CF Woodford Equity Income fund has suffered outflows this year as performance had weakened.

As the below chart shows, the five FE Crown-rated fund has barely kept pace with the benchmark or average IA UK Equity Income sector fund this year, registering a 0.96 per cent loss in the first 11 months of 2017.

Performance of fund vs sector & benchmark in 2017

 
Source: FE Analytics

The fund has been hit by several stock specific issues prompting some big-name backers to begin redeeming their investments.

Indeed, during the 12 months to 31 October, the fund was one of the biggest shedders of money in the UK Equity Income sector, with fund size falling by £750.6m to £8.7bn, according to data from FE Analytics.

Among investors pulling out of the fund were Jupiter’s Merlin range, overseen by John Chatfeild-Roberts, and multi-manager Architas.

Investors have become increasingly concerned by share price falls at several high-profile holdings, including pharmaceutical company AstraZeneca and non-conventional lender Provident Financial.

The former suffered a significant setback after a trial of lung cancer drug Mystic failed to yield the desired results earlier this year.

Provident Financial, meanwhile, has been forced to scrap dividends and issue two profit warnings after a restructure of the business had a significant impact on earnings.

Such issues have called into question Woodford’s stockpicking ability given the lacklustre performance by the fund.

But the star manager recently warned of a bubble in financial markets, arguing that a correction was potentially on the way.

He said: “The areas of the market that are hot, that are popular, that the consensus seems to think there is no risk in, are the very areas I see lots of risk in.

“And, equally, the areas of the market that consensus has encouraged investors to disinvest from, to run away from, as I put it, are the areas where I see greatest opportunities.”

However, not all fund pickers have stopped backing Woodford.


 

Sheridan Admans (pictured), manager of The Share Centre’s multi-manager funds, said the Woodford fund currently represents significant portions of its own fund of funds.

Admans said Woodford’s fund represented around 11 per cent of the TC Share Centre Multi Manager Cautious fund, 5.89 per cent of the TC Share Centre Multi Manager Balanced fund and 4.59 per cent of the TC Share Centre Multi Manager Adventurous Portfolio.

He said: “A few large holders of the CF Woodford Equity Income fund have recently relinquished their holdings for reasons best known to them. All the while, we at The Share Centre, remain happy building our position.”

Admans highlighted Woodford’s ability to invest across the market cap spectrum taking positions in early stage companies through to large caps, in a “diverse range of sub-sectors”.

The multi-manager also said the firm took a positive outlook on two of Woodford’s favoured sectors: healthcare and financials.

He explained: “We remain of the view that monetary policy for now is going to give way to tightening and fiscal expansion, which if we are right, will be supportive of higher rates to the benefit of financials.

“As well as this, we believe there remains a long-term compelling argument for investing in healthcare.”

He added: “Technological change, combined with the shift to more aged populations in a number of global markets and greater consumption of healthcare products and services, has resulted in the sector exhibiting more growth characteristics.

“In addition, certain modern day health problems such as diabetes and obesity are presenting investment opportunities, as consumers become more affluent and healthcare more affordable in emerging economies.”

Admans also highlighted Woodford’s exposure to the consumer goods sector, which represents 13.3 per cent of the portfolio and consists majority of which is invested in housing. Given the support from both sides of the political spectrum in the UK for home construction and ownership, the multi-manager said he was comfortable with the position.

“House builders continue to generate and give back a lot of cash to shareholders and the potential for further wholesale changes to planning could give a further boost to the sector,” he said.

“In the meantime, house builders are in a position rightly or wrongly where they can control prices and supply in the broad market, which should continue to be supportive for cash flows.”

As well as CF Woodford Equity Income, the firm also has a more positive stance on the Woodford’s closed-end vehicle: Patient Capital Trust.

The £808.4m trust has also come in for some criticism more recently over performance and its widening discount.

The trust has fallen by 8.13 per cent in the year to 5 December compared with a gain of 14.30 per cent for the average IT UK All Companies trust. It is also currently trading at a discount of 8.4 per cent, according to the Association of Investment Companies.


 

The nature of the trust’s strategy of investing in smaller, early-stage companies including university spin-outs and technology start-ups as well as its long-term focus has caused some concerns among investors.

Admans noted that Woodford has decades of experience of investing in early-stage companies and highlighted recent government efforts to support start-ups.

“Having patience is a prerequisite when investing in early stage companies and so is holding the Woodford Patient Capital Trust,” he said.

“We continue to believe over the long term, small and non-listed companies have a greater ability to grow their revenues over large-caps.

“Additional key characteristics are they tend to operate in less efficient markets where active management can really add value, there is a greater chance they will be acquired, they tend to have less leverage and finally they tend to trade at a discount to their intrinsic value.”

Ultimately, Admans said Woodford’s woes are faced by every fund manager over a given period.

“We recognise that all fund managers are at risk of having some blow-ups in the portfolios over time and Neil is not immune to this,” he explained.

“Nevertheless, Neil’s approach is tried and tested and the fund has outperformed its FTSE All Share benchmark since inception, with lower drawdown and downside risk.”

 

Admans manages the risk-rated funds alongside head of investment research and advisory services Andy Parsons.

As the chart below shows, the four FE Crown-rated £20.3m TC Share Multi Manager Adventurous has grown by 38.04 per cent over three years, the £51.5m TC Share Multi Manager Balanced has returned 31.68 per cent, and the £27.7m TC Share Multi Manager Cautious is up by 22.34 per cent.

Performance of funds YTD

 
Source: FE Analytics

The Adventurous fund has an ongoing charges figure (OCF) of 1.82 per cent, the Balanced portfolio charges a figure of 1.67 per cent, and the Cautious strategy has a charge of 1.69 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.