Neil Woodford On Disappointment

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In June, the CF Woodford Equity Fund reached its three-year anniversary meeting investors’ return expectations over that time period. However, during July and August several of the fund’s holdings suffered significant share price weakness which has impacted the fund’s performance since. We have always encouraged dialogue with our investors and understandably some have been in touch, not only to express their disappointment, but also to seek answers as to why the fund’s performance has suffered. In the following video, Neil explains events and what they mean for the fund’s strategy…

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Mitchell Fraser-Jones: So, Neil, we're going to start with a question about recent performance. I think it's fair to say that the funds had a challenging summer. Can you tell us why you think the fund is underperformed over the last few weeks?

Neil Woodford: You know, we've had a really difficult two months really. July and August have been particularly difficult. I think there's a temptation to focus on the company's specific issues and think about events that have taken place within individual companies that have resulted in share price fall. So for example, AstraZeneca announced the trial results, actually along with very good results and a number of other very good very positive things.

But nevertheless, the market focused on a negative outcome for the progression-free survival endpoint for the Mystic trial, which is an important trial for Astra. And nevertheless, that was a sort of an event that the market focused on. The share price fell 15%. It's the biggest position in the portfolios. And of course, that was quite damaging to the funds in terms of the hits.

Then, of course, there was Provident Financial that came in June originally and then, again, a few weeks ago with another profit warning. That company saw a gigantic fall at one stage. It fell nearly 2/3rds on one day. And that followed two profit warnings, which we've talked about on the blog.

And I think it's tempting to think, well, maybe the underperformance is a product of these sort of company specific problems. And certainly, they've not helped. But for me, when I think about the portfolio in the round and think about what's happening in the stock market, more broadly, and what's happening in the portfolio, the underperformance is a product much more of the rather odd characteristics of this bull run in the stock market. It is a very narrowly-led market. The stock market seems to want to bid up the prices of stocks that I've talked about before, which provide exposure essentially to Chinese credit growth.

Mitchell Fraser-Jones: What do you mean by Chinese credit growth?

Neil Woodford: Well, Chinese credit growth has been very strong. As you know, the administration in China has highlighted the importance of-- the paramount importance, frankly, to the administration in China is achieving a 6.5% GDP growth number. That has become the singular focus really of the administration, particularly, ahead of a very important 19th party Congress in November, early in November, where Xi Jinping will be sort of reasserting his authority over the party and over the economy, not just in terms of the current administration, but indeed looking forward for the next five years. So it's very important for the administration to have a very sort of strong and benign lead up from an economic point of view to this Congress in November.

And of course parts of the market that don’t deliver other bits of the market we’re I’m seeing a lot of value. So domestic economic cyclicals health care and indeed our small early stage portfolio none of those parts of the market provide any exposure to this sort of this one dimensional story that the market really loves.

Mitchell Fraser-Jones: How is that having an impact on the UK stock market?

Neil Woodford: In very simple terms, the stock market has decided that Asia, China is good, the UK is bad. It's a very sort of-- it sounds very simple. And maybe it is an oversimplification. But I see-- I see that driving-- I see that preference playing out in the stock market daily.

And we can use all sorts of stock examples to highlight why or how the stock-- the consensus really-- I'm talking about consensus here. When I talk about the market, I'm talking about a consensus view. The consensus view is playing out by bidding up stocks that give exposure to this sort of Asian and China credit growth story and exiting out of anything really that doesn't deliver that. And of course, parts of the market that don't deliver are the bits of the market where I'm seeing a lot of value-- so domestic economic cyclicals, health care, and indeed, small early stage portfolio.

None of those parts of the market provide any exposure to this sort of-- this one-dimensional story that the market really loves. I worry that the story that the market is chasing at the moment is dangerous. And that's why I haven't wanted to play that story.

Mitchell Fraser-Jones: How does it how does it make you feel when your funds go through a period of performance like this?

Neil Woodford: So it's incredibly painful and difficult thing to have to navigate. I'm very disappointed with the short-term performance and indeed, have been criticised for it. People on our blog have been criticising me. I've been criticised in the media.

And I think I'm right to be criticised. It's been a difficult period. And I'm very sorry for the poor performance that we've delivered really now since 2016.

But in terms of what it means for me as a fund manager, it's very, very important that through a period like this that you maintain your investment discipline. I think we've rehearsed with investors many times how I invest, what I look for, why I'm thinking what I think, what's driving my investment decisions, and to remind people, in short, it's the fundamentals of the economy and the businesses I'm investing and indeed, sometimes the businesses I'm not investing in. But I'm trying to focus my investment attention always on what's really happening in the real world. That's what I mean by fundamentals-- I mean, the real activity in the economy and the real activity-- the real performance of the businesses that we're investing in, not with the stock market perception or the stock market prejudice, but the reality of the real world.

That's what I focus on. And then I apply a valuation overlay to all of that. What's the right valuation for the businesses that I'm investing in and indeed, the ones I'm not investing in?

Where is the market making an error? Where has the market got the wrong end of the stick? Has it distorted reality? And it often does.

It did it before. It's done it on numerous occasions in my career. And it is certainly doing it now in my view. That is a painful place to be.

And all the temptation is to move away from that and to soften that and to go and do what everybody else is doing but more minors, sell the UK cyclicals, and just hide in the group where everybody else is investing. Maynard Keynes said one day that well, he's I mean, not just a brilliant economist, but he was a very successful fund manager. He said, it is often better to fail conventionally than to succeed unconventionally. And I think it's at times like this I remember those words, because it is-- the pressure is relentless to do what everybody else is doing.

And that's a bit like when I was playing rugby at a reasonably good level a few years-- quite a few years ago now, pre-season training was always really tough. You would push yourself really hard after-- maybe after two months off the summer. You know, you'd feel really ill at the end of the session if you pushed yourself really hard. You'd lie at side of the pitch wanting to be ill. And eventually, half an hour later you got over it.

But you put the hard yards in, because you knew it was the right thing to do. It would have been easy to back off a bit. But of course, that would mean that when the season comes, the tough season, the tough games you're going to have in ahead, you wouldn't be fit enough. You wouldn't be as prepared as you should have been.

The temptation is to take the easy option, to sort of hide-- as I've said, to hide in the strategy that everybody else is pursuing. And then all the attention, and all the fuss, and all the criticism would go away. But as I've said, that would be a betrayal of my investment principles. I believe entirely the wrong thing to do in terms of the long-term interest-- medium and long-term interests of our investors.

See the full transcript below.

2017: A challenging year so far...

Year to date

  • Woodford Equity Income Fund +0.59%
  • FTSE All Share index +8.21%
  • Underperformance -7.63%

Neil Woodford

...But it's not just about stock specifics

  • Provident Financial accounts for broadly half of underperformance
  • AstraZeneca, despite its Mystic trial data, has provided a positive contribution to the fund

Neil Woodford

View the full stock contribution analysis (over 1 year to 30 June 2017)

...Market leadership has remained very narrow

  • 8 stocks account for over half of FTSE All Share gains this year (4.15% total return)
  • HSBC, Unilever, Diageo, Glencore, Rio Tinto, Vodafone, Prudential, British American Tobacco
  • 650 stocks make up the rest of the gains (4.06% total return)

2017 FTSE All Share index performers

Source: Bloomberg

Neil Woodford

See the full PDF below.

Article by Mitchell Fraser-Jones, Woodford Funds

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