Oracle of Oxford Sees Red as Stock-Picking Powers Misfire
(Bloomberg) -- A master of British stock-picking has lost his touch.
Former Invesco Perpetual star Neil Woodford’s flagship fund has trailed the benchmark index since trumping peers in 2015, but now the Oxford-based investor’s main investment vehicle is in the red and his slump is deepening.
A biotech developer in which Woodford has a major stake, Prothena, lost almost two-thirds of its value Monday after the Dublin-based company scrapped its most promising drug. Then his 6.7 billion-pound ($9.3 billion) main fund dropped the most in almost three months, extending this year’s decline to more than 7 percent, one of the worst performances among competitors.
Woodford, a Warren Buffett devotee who prides himself on contrarian views like being bullish on Brexit’s impact on the British economy, was quick to reassure clients that their money remained in good hands.
“I am very confident that the stock market’s mood has changed,” Woodford, 58, said in a video posted on his firm’s website after Prothena’s plunge. “I think there’s good reason for that change because the economic fundamentals are beginning to evolve in a way that the market is now surprised by.”
The star manager became more confident about the outlook for the U.K. last year, saying investors have become far too pessimistic after the Brexit vote, and began pivoting the fund towards domestic-focused companies including Lloyds Banking Group Plc and homebuilders. A report by Capital Economics for the asset manager in November found that leaving the EU is unlikely to have a meaningful impact on the large proportion of the British economy that doesn’t participate in international trade. The U.K. economy registered its worst performance since the end of 2012 in the first quarter as bad weather hit retail sales and slowed building work.
In a quarter-century at Invesco, Woodford gained a reputation for prescience by correctly calling major swings in technology, tobacco and other stocks. But his performance over three years, a key industry metric, now ranks in just the second percentile among peers, according to data compiled by Bloomberg.
Shareholders of Woodford’s biggest fund would’ve been much better off if they’d just bet on the FTSE 100 index, a cheaper play that requires no special insight. A 100 pound gamble on the measure at the start of 2016 would’ve been worth about 130 pounds today, rather than a 4 pound loss.
With the world moving toward index investing and lower fees anyway, the losing streak is giving a client pool that was once among the most devoted in the industry fresh reason to bail. When he left Invesco to co-found Woodford Investment Management in 2014 he took 3.7 billion pounds with him—far more than Bill Gross was able to raise after he left Pimco for Janus that year.
The so-called value investor continued to attract cash into last year, when the LF Woodford Equity Income Fund’s assets peaked at more than 10 billion pounds. But losses and withdrawals have combined to shrink the fund by about a third since May 2017, after a slew of bad news for key holdings such as pharmaceutical giant AstraZeneca Plc, sub-prime lender Provident Financial Plc and Capita Plc, an outsourcing firm.
Woodford and his partners have made openness and transparency part of their corporate mission, an admirable undertaking that may actually be hurting their bottom line, according to Richard Philbin, chief investment officer of Wellian Investment Solutions, which helps clients allocate about 1.5 billion pounds. They post their positions online and some hedge funds are surely using that data to bet against them, he said.
“If everyone knows what holdings he has, how liquid they are and that he is witnessing negative cash flow, it seems obvious that hedge funds could see this as an opportunity to play the other side of the trade,” Philbin said.
Woodford said he was extremely disappointed by the failure of Prothena’s NEOD001 drug, but he also defended his investment, citing the company’s expertise in proteins that have been implicated in a number of neurological disorders. Prothena also has $500 million in cash, more than its market value.
Down, Not Out
Muddy Waters Capital founder Carson Block and Kerrisdale Capital Management’s Sahm Adrangi are two competitors who had publicly predicted NEOD001’s failure and profited from it.
“We were short two stocks Woodford was long—Allied Minds and Prothena,” Adrangi said in an interview before Monday’s announcement. Allied Minds is a venture capital firm focused on life-science and technology startups that has halved its stable of subsidiaries to 11 since December 2016. “We felt they were very overvalued and worth a lot less where they were trading,” he said.
Other funds overseen by Woodford are also lagging. The St James’s Place U.K High Income Unit Trust and Patient Capital Trust both rank in the first percentile among peers over the past three years, according to Bloomberg data.
Woodford is far from being the only big-name trader to get it wrong. Bill Miller, the Legg Mason manager who famously beat the Standard & Poor’s 500 Index for a record 15 years, left his main fund in 2011 after trailing the index for four of the previous five years.
And it’s not as if Woodford Investment is losing money itself. The firm posted net income of 18.2 million pounds in the year through March 2017, the latest period available. That’s mainly due to fees, which range from 0.65 percent to 1.5 percent a year at the flagship fund, which is more than index investing but less than average for active management.
Laith Khalaf, a senior analyst at Hargreaves Lansdown Plc, which sells funds including Woodford’s, said it would be foolish to write off an investor with a three-decade track record that’s earned him the Oracle of Oxford sobriquet.
“Though he has had a difficult period of late, he’s turned 1 pound into almost 27 pounds over his entire career, compared with the 12 pounds from the U.K. stock market,” Khalaf said. “That record shouldn’t be ignored.”
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