Neil Woodford

    Interview: ‘The world is a very difficult place’

    7 March 2015

    It’s quite rare to come across successful professionals lobbing grenades at the industry that has brought them fame and fortune. When did you last hear a ‘magic circle’ City lawyer or a bulge-bracket investment banker complaining about the level of fees their firms charge? It doesn’t really happen. It’s a grown-up world out there and you take what you can get.

    So it’s both interesting and refreshing to hear 55-year-old Neil Woodford, one of the biggest hitters in the fund management industry, pointing out some of the ways in which top firms in his line of work come up short. Quitting his job at industry giant Invesco Perpetual two years ago to set up his own fund-management business was, he says, an opportunity to do things differently — and better.

    In the 25 years Woodford spent working for his former firm, it grew from a start-up based in Henley-on-Thames with some £300 million under management to a multi-billion-dollar megalith run, following its takeover by Invesco, from Atlanta in the US. His own funds, a go-to choice for thousands of professional and private investors in the UK, accounted for £33 billion of the total, more than any other UK fund manager. The consistently strong performance of his funds established his reputation as one of the most respected (and highly paid) figures in the business.

    Yet leaving to set up his own firm, running the money himself while his colleague Craig Newman runs the business, has proved to be a liberating experience. The environment at Invesco Perpetual had become, he says, ‘quite difficult for a long period of time’. With 60 years of experience between them, ‘Craig and I, starting with a blank sheet of paper, have been able to design a business that works well not just for the fund managers and the employees of the organisation, but better for clients as well.’

    What that means in practice is streamlining operations, cutting the management fee investors have to pay, and providing much more information about how and where the fund is investing. ‘We’ve got a very disruptive pricing model and we’re a lot cheaper than we were before. We’re able to communicate very openly and transparently. Nobody else comes close to providing what we’re providing. We’re treating our investors like grown-ups. We haven’t got anything to hide.’

    This is a pointed reference to the way many firms that sell funds to the public have traditionally disguised quite how much investors pay for the privilege. After years of dithering, the so-called Retail Distribution Review two years ago led regulators finally to ban commission payments to financial advisers and other intermediaries, and require fund managers to give more information about the all-in cost of their charges.

    Woodford’s view is that ‘RDR is changing the business for the better. There’s more change to come too. The industry needs to change and maybe the pace should pick up a bit. It’s been a little complacent. While I am not necessarily a supporter of all the regulation that we’re subject to, I’m all for the notion that there should be more transparency about how and what you charge a client.’

    His hope is that greater disclosure will prompt more money to flow to those funds that are genuinely adding value and away from so-called ‘closet trackers’, funds that charge hefty fees for doing little more than copying what’s in the main market indices. Some 30 per cent of the 2,500 funds sold in the UK are guilty of this practice, a dirty little industry secret which Woodford rightly describes as ‘outrageous’. His own investment style being predicated on never following the herd, it’s not something of which he himself has ever been accused.

    Woodford’s success and reputation as an investor rests on his rare but proven ability to think for himself and plough a lonely course even when majority professional opinion is against him. For years he has invested heavily in two sectors (tobacco and pharmaceuticals) that most investors like to hate, and avoided two others (‘Big Oil’ and banks) that make up a significant proportion of the UK equity market. The refusal to own BP and Shell is particularly striking given that his funds are ‘equity income’ funds and that the two big oil companies account for a sizeable chunk of all dividends paid by UK-listed companies. Woodford’s argument is that Big Oil is overinvesting in an ultimately futile effort to replace the reserves that once provided supernormal profits.

    Another way in which Woodford has ploughed his own furrow has been his willingness to put a chunk of his fund into smaller, early-stage businesses, some of them not even listed yet. These are higher-risk, potentially higher-return investments that require different skills to pick and monitor. So convinced is he by the merits of this style of investment that he has announced the launch (next month) of a new closed-ended fund that will invest in nothing else.

    Lonely road: for years, Neil Woodford has shunned ‘Big Oil’ shares
    Lonely road: for years, Neil Woodford has shunned ‘Big Oil’ shares

    The aim is to help fill the notorious funding gap that exists particularly for university-sourced scientific breakthroughs — the gap between venture capital, private equity and public equity markets. Most fund managers are too short-term and risk-averse to make these kind of investments, which Woodford believes are vital if the UK is ever to match the US in the development of world-beating technology businesses. ‘It’s the failure of my industry to understand the needs of the science and innovation community, or even to want to participate in it, that is the single biggest factor behind our failure as a country to translate the great science we have into commercial success.’

    That said, Woodford’s optimism about the potential of early-stage businesses is matched by his pessimism about the general economic and political environment. He admits to being a fully paid-up supporter of the ‘secular stagnation’ thesis advanced by Larry Summers and others. The idea that the world will return any time soon to the kind of growth we experienced before the global financial crisis is wishful thinking. ‘My view on the world is that it’s a very difficult place. We are a long way away from the consensual view that just around the corner there’s a return to normal, when economies are going to start to grow, inflation will normalise, interest rates will normalise, QE will be a thing of the past and we will be back to where we were before the crisis. I think this consensus view is completely and utterly wrong. It isn’t the product of rational analysis. It’s a wish.’

    Only the US has had any real success in fixing its banking system and reducing debt in the private sector, he says, though even over there the risk of a policy error, raising interest rates too soon, remains high. The relative success of the US economy is ‘for me the counter-factual that proves how policy has gone wrong in Europe, and to some extent in the UK’. The idea that you can ‘insulate the economy from all the nasty effects of a crisis and somehow magically growth will return’ is fanciful. ‘It won’t and it can’t.’ In the meantime political risk and uncertainty are growing.

    So where does this leave investors? Remember, he says, that reinvested dividends account for the great majority of equity market returns over time, so equity income remains a tried and tested approach. Investors need to remain highly selective in what they look for, however. ‘That’s what I’m paid to do and that’s why I believe I can deliver single-digit returns per annum over a three-to- five-year view. That’s what I said when we started the new fund and that’s what I would say now, but I don’t disguise it’s going to be bloody difficult.’ If even the UK’s most famous fund manager thinks that, you have to worry even more about the rest.