Wednesday, October 16, 2013

Star Manager Announces Departure from Invesco

The stock of Investco (ticker: IVZ) took a -8% hit yesterday when it was announced that its star portfolio manager Neil Woodford was leaving from its U.K. operations. The stock is off another -2% this morning.

While I have not followed Woodford all that closely over the years, one cannot help but marvel at his spectacular track record.

Woodford had been managing Invesco funds for nearly 25 years.  Many observers had called him the "Warren Buffett of Europe" based on his admiration of Buffett and his very similar investing style.

Although he is famously media-shy, this excerpt from a London Telegraph  profile of Woodford that was published today provided a nice summary of his investment success:

Over his career Mr Woodford’s performance numbers speak for themselves. His Invesco Perpetual High Income has delivered investors a return of 2,224pc from February 1990 to October 2013. His Invesco Perpetual Income fund has made gains of 1,725pc from October 1990 to October 2013. A saver who pumped £10,000 into one of his funds would today be sitting on a return of £232,400 and £182.500, respectively.

The amount of money Woodford managed has grown enormously in recent years. Since the financial crisis (September 2007) his Invesco High Income fund has grown from £7.5bn to almost £14bn today. The Invesco Perpetual Income fund has jumped from £6bn to £10.7bn.The intense performance challenge of dealing with large sums of inflows may have lead to Woodford's decision to leave.

Like Buffett, Woodford does not actively trade the securities he manages, nor is he afraid to take large positions in just a few holdings. He also can be an activist in his investments, occasionally summoning company managements to his offices to push for changes.

Here's an excerpt from a  London Guardian article published in October 2012:

It is evidence of how Woodford, who summons FTSE 100 bosses to his Henley headquarters rather than travelling to the City, uses his power. To many, he is an example of what John Kay, commissioned by the government to encourage long-term investment, should look for in a fund manager, holding shares for 15 years rather than switching in and out in search of a quick buck....

 Despite that, and despite having the look of a forthright panellist on a TV football programme, he is uncomfortable with punditry. Indeed, he told the Guardian that he did not regard himself as powerful. "I'm a very active, long-term investor. My average holding is around 15 years. What that means is exactly what John Kay says: with ownership comes responsibility."...

Author and financial columnist Jonathan Davies wrote a piece on Woodford recently on his blog.  It is a good illustration of Woodford's investing style:

Woodford’s three big calls this year are as follows:

1. Buying into big pharma

GlaxoSmithKline is now the largest holding in Woodford’s £8 billion Invesco Perpetual High Income fund, accounting for 8.3% of its value. AstraZeneca (8.2%) is his second largest bet. The fact that 28 brokers rate AstraZeneca as a ‘hold’ or worse, and only seven rate it as a buy, is no bad thing for a contrarian, but it underlines how out of step with the market he now is. 

Astra Zeneca trades on a p/e ratio of 9.6, compared to the FTSE All Share’s 17.16 times, and yields 4.95% compared to the All Share’s 3.43%. The dividend is covered four times, while Glaxo’s dividend is covered two times. The market is obsessed with the patent expiry problems both companies face, but are underestimating the organic growth that they retain. 

2. Selling out of the oil majors
Woodford sold out his holdings in BP and Shell over the summer, trading them for increased holdings in the pharmaceutical companies. His argument is that the majors will struggle to hold their dividends next year,which may well be uncovered...

3. Spurning the banks
Woodford famously held no bank shares going into the financial crisis, a bold and anti-consensus stance that did his investors proud until this year. But he has stubbornly refused to buy back into the sector despite its strong rally from its start-of-year lows...Woodford’s reluctance has badly hurt the relative performance of his funds.

The question for the thousands of investors who have invested in Woodford's funds is how they should proceed from here.

Most of the London analysts believe yesterday's sell-off is overdone, and that Invesco has able replacements for Woodford.

That said, while I have no particular insights into Invesco funds, I would only note that the performance of Fidelity's Magellan fund never recovered from the departure of Peter Lynch in the early 1990's.