Finance

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

"Markets know more than you," says Jim Rogers, a founding father of the hedge-fund industry. "The market is right and you are wrong," says Yra Harris, who traded in Chicago's futures pits for almost three decades. "Markets are very humbling," says Sushil Wadhwani, a former Bank of England policy maker who runs his own fund.

Those quotes are from hedge-fund adviser Steve Drobny's 2006 book "Inside the House of Money," which details insights from 14 of the world's leading investors. It's a paperback Neil Woodford, one of the U.K.'s best-known and most successful fund managers, could use on his bedside table right now.

In the 25 years or so that Woodford ran the Invesco Perpetual High Income fund, it gained more than 2,000 percent. After a series of recent missteps, though, the website Citywire currently ranks him 95th out of 100 U.K. equity fund managers.

Last week, Woodford published a video apologizing -- sort of -- for his poor performance in the past couple of years. The video was long on culpa, but short on mea. But it does highlight one aspect of the active versus passive debate that's currently enthralling the investment industry -- that money allocated to even a star stock-picker will have bad years as well as good ones.

Since the launch of Woodford Investment Management in 2014, investors in his 12 billion-pound ($16 billion) flagship fund had handily outperformed the wider U.K. equity market, at least until the middle of this year.

Still Ahead, But Only Just
Total return for Woodford Equity Income fund since inception versus broader market
Source: Bloomberg

Since June, however, the fund has under-performed significantly.

Summertime, and the Livin' Wasn't Easy
Since peaking in June, the total return of Woodford's fund has underperformed the wider market
Source: Bloomberg

About half of this year's under-performance is down to a single stock -- Provident Financial Plc, the crisis-hit doorstep lender which is down more than 70 percent this year. Woodford owned as much as 18 percent of the company.

AstraZeneca, another major Woodford holding, has also dented the fund's performance. The drugmaker is down more than 10 percent from its mid-year peak. Both companies have been long-time favorites of Woodford -- calling into question just how active a manager he really is.

In May 2014, when he was setting up his new fund, Woodford told the Daily Telegraph that taking a stake in AstraZeneca when it was out of favor with investors was the trade he was most proud of in his career. He also owned Provident Financial for "a number of years" before setting up his own fund, according to comments posted on his website last week.

According to Woodford, the share-price reaction at Provident Financial has been "hysterical." He said the shares were undervalued even before they dropped by 66 percent on Aug. 22. He also said last month that the fund has been buying more AstraZeneca shares.

Other portfolio losers this year include Brave Bison Group Plc, an online video distributor, Northwest Biotherapeutics, which develops cancer therapies, and auto-immune drugmaker 4D Pharma Plc.

Some You Lose...
Cumulative total returns for some of Woodford's biggest losers
Source: Company filings, Bloomberg

But Woodford has also had some big wins, including Purplebricks Group Plc, a real-estate listings company, Burford Capital Ltd., which finances corporate litigation, online travel booking company Hostelworld Group Plc, and freight and logistics supplier Stobart Group Ltd.

...But Some You Win
Cumulative total returns for some of Woodford's biggest winners
Source: Company filings, Bloomberg

Woodford's video confession is aimed more at stemming potential redemptions than accepting blame and admitting to any missteps. That may be a mistake; Provident Financial, in particular, seems to have made some fundamental errors in its core business that Woodford isn't acknowledging. (Dumping his stake, though, isn't really an option given the size of his holding and the likely impact on the already beleaguered stock price.)

Asked in the video how the recent underperformance has made him feel, Woodford takes almost seven seconds to answer. "It's an incredibly painful and difficult thing to have to navigate," he finally says. A second series of videos posted in recent days under the moniker "Awkward Corner" shows Woodford answering questions sent in by e-mail; his responses are, at best, pugnacious.

Perhaps the best way to think of an investment with Woodford is that you're buying a semi-passive fund based on an index of stocks Woodford believes in passionately. His website is a model of transparency, listing all of his investments and their contributions to performance.

"I believe I have the right portfolio for the environment we're likely to see in the next three to five years," he says. For investors, Woodford's position is unapologetically clear. But a little humility might not go amiss.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert in London at magilbert@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net