Is Neil Woodford suffering his own mini dot com bust?

The trials of Woodford.

Woodford as a fund manager at Invesco Perpetual famously came through the early noughties dot com crash in better shape than most; valuation discipline and a nose for a bargain led him to concentrate on ‘old economy’ stocks and whilst others were flirting with a Vodafone on 80 times earnings, Woodford was buying tobacco and pharma stocks on cheap ratings. When the Tech and telecom bust came, Woodford’s performance shone through and his then Invesco Perpetual equity income fund grew to be a staple in many retail investors’ portfolios. He was hailed as a British Warren Buffett.

On the back of this success Woodford left Invesco and in 2014 launched his own business, Woodford Investment Management. At first things went well; his new Woodford Equity Income Fund attracted big money (with a current size of £10 billion) and for the first two years continued his previous strong record of outperformance. There was a slight twist, however. Woodford had at Invesco invested small amounts in unquoted and small cap growth companies in the tech and healthcare sectors, not originally his bread and butter. This tendency increased when he was freed from the constraints of a large fund manager, which had presumably been anxious not to damage the goose that kept laying golden eggs. And in 2015 he took it to its logical conclusion by launching a closed end fund, to great marketing fan-fair, devoted to investing purely in such stocks: Woodford Patient Capital (WPCT). The marketing pitch here was aided by a very compelling (cheap) charging structure.


Was Patience his Waterloo? 

By the nature of the investments, mainly unquoted and early stage, not much happened in the first year of WPCT. Nonetheless, these were not the sort of investments likely to show immediate gains; but also they were investments that did potentially require quite a bit of care and attention. There were in fact a few write downs such that the NAV fell well below the 100p launch figure; against a pretty strong equity market the £900m odd invested looked to be rather poor performing. The clue was of course in the name; investors needed to be patient. Anxious however, it would seem, to keep building his business whilst the going was good, in March this year he reverted to type and launched a variant of the Equity Income fund, The Woodford Income Focus Fund.


Annus horribilis

2017 is turning into a bit of nightmare for Woodford: just at the time of the launch of his new Income Focus Fund, one of the large holdings in both WPCT and his existing Equity Income fund – Allied Minds – wrote down some of its investments and announced a change of CEO. Allied Minds (ALM) is effectively a quoted fund of early stage tech and healthcare companies. The price fell from a high of 470p in early 2017 – Woodford had invested more money at 367p at end of 2016, as indeed had Invesco – to c.140p currently. In terms of the current book value of the company’s investments – estimated at $415.8m at 30th June – Woodford’s investment multiple in late 2016 was circa. 2.7 times. If not exactly dot com era stratospheric, hardly deep value. Even at the current depressed price, it is only trading at roughly the estimated book value of its investments; of course there may be plenty of hidden value there.


Trouble comes in threes       

But ALM was nothing compared to the shock administered in July by three of his largest equity income holdings; Astra Zeneca, Imperial Brands and Provident Financial hurt in turn by bad news on a drug trial, US regulatory warning on tobacco and a profit warning. Together these three stocks made up close to 20% of the Equity Income Fund and 16% of the Income Focus Fund. Against a market which was pretty flat, they fell an average of 12%. Not surprisingly The Woodford Funds were some of the worst performing in the year to 31st July.


Not so Provident 

And his woes did not end there. Another go getting growth company, Purplebricks, having been a strong performer for most of the year, has corrected somewhat of late, after two BBC features ‘relating principally to the clarity of the deferred payment facility available to customers, the Group’s compliance with a recent Advertising Standards Association (“ASA”) ruling, and alleged exaggerated claims by some of its Local Property Experts about levels of instructions and/or sales they had obtained.’ Of course the company claimed there was nothing dodgy about any of its operations. PURP reported a loss in its last half year but is valued at over £1 billion.

The latest hammer blow fell today (22.08.17) with another announcement from Provident Financial. On a further profit warning and the departure of its CEO the share price has fallen an astonishing 70% or so; as recently as May the price was £32.5 valuing what is arguably no more than a sub-prime lender at, what seemed to us a very punchy, 8.1 times book value. Now at £5.7 it is a much more reasonable 1.5 times; but debt represents roughly 70% of the Enterprise Value.



Bad luck, too much concentration on building his business, too may labour intensive problem companies or not enough specialist knowledge? Any or all of these may be responsible. Where to now? There are almost bound to be outflows which may depress the price of some of the smaller cap quoted companies in the portfolios; since a number of these are shared across the portfolios it is likely that the NAV of WPCT, even though it is a closed end fund, may be affected as well. Now may not be the best time to buy; but Woodford’s funds do offer something not generally available, and after a period when things hopefully will settle down, are still well worth a look. The funds are a lot better value than they were two months ago!



This research has been produced by David Liddell, chief executive and major shareholder in IpsoFacto Limited which has approved this research. David may have equity holdings in any or all of the stocks listed.

The information contained in this research has been obtained from sources that IpsoFacto Limited believes to be reliable and accurate. However, it has not been independently verified and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties.

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