The one-time star fund manager and investment guru Neil Woodford has taken another hit to his fortunes this week as another fund agency cuts the rating on his Woodford Equity Income fund.
Morningstar has downgraded the Woodford Equity Income fund from a silver Analyst Rating to bronze following continued poor performance.
The fund is the absolute worst performer of all the 230 funds in the Investment Association’s UK All Companies sector over the past year, having fallen 11%, compared to a sector average gain of 5%.
Over the past three years, the Woodford Equity Income fund has made investors just a 1% return.
Morningstar has explained its decision to downgrade by saying the fund has too greater exposure to small-cap stocks and unquoted companies.
“The bias to the former has become far more pronounced over the past couple of years, in part as a result of Woodford’s more positive view on the UK economy since first-quarter 2017,” says Peter Brunt, a senior analyst at Morningstar.
“While the group has shown its ability to meet sizable redemptions over the past year, with the fund still standing at over £6bn, such extreme positioning in less-liquid parts of the market make it less nimble than competitors.”
Stock problems
As well as a bias towards illiquid stocks causing concerns Woodford has also experienced big problems with specific investments that have made many investors – including the experts – anxious.
One of his largest investments, Provident Financial, has had a terrible year with the share price tumbling from £25 to just £6.54.
Another big investment, US biotech firm Prothena, has had bad news about a drug trial failing, sending the share price into a tailspin.
Add in a falling share price for another big investment, the AA, and the fund’s overall performance has been pulled further down.
“While contrarian investing comes with a degree of risk and issues could be expected from time to time, the nature of some of the problems and respective position sizes in the portfolio give us cause for concern,” says Brunt.
“As a result, while we believe that the fund still has long-term investment merit, our conviction has waned, seeing the Morningstar Analyst Rating lowered to bronze from silver.”
Time to dump Woodford?
Woodford and his Equity Income fund may be going through a bad time at the moment, but that doesn’t necessarily mean you should dump it.
Investing is a long-term game and when you look at the big picture it isn’t quite as bleak.
Over the past 18 years – a period which covers the dotcom crash and the credit crunch – Woodford has delivered a 7.7% annualised return against a UK Equity Income sector average of 6.1% and a FTSE All Share Index average of 6%.
As Morningstar said in their downgrade “the fund still had long-term investment merit”.
Woodford is a contrarian bet, consistently investing against the grain. He shunned tech stocks ahead of the dotcom crash and sold bank stocks before the credit crunch. Both times history proved his instincts were correct.
At the moment he is defending his woes saying: “Our strategy has been out of step with the stock market view for some time now, however…we are seeing a number of macroeconomic developments that are increasingly calling into the question the consensus view.”
While the FTSE hits new highs and the going seems good for investors I’m not hugely surprised Woodford is attracting criticism for not following the herd. But, I’ll keep tucking a small amount away into his Equity Income Fund on the off-chance his instincts prove correct once again.