Investment Newsletter June 2014
Can’t see the Woodford... By Mike Deverell Investment Manager
There have been plenty of headlines about the new fund from Neil Woodford. This is the most eagerly anticipated fund launch since Anthony Bolton, once of Fidelity’s Special Situations and one of the UK’s best known fund managers, ventured to China to try his hand out there. Bolton’s venture had limited success, with him unable to translate his long history of outperformance investing in UK stocks to the Chinese market. Woodford’s case is different. Having left Invesco Perpetual, for whom he ran their successful Income and High Income funds for more than 20 years, he set up his own firm, Woodford Investment Management. He is launching an equity income fund with exactly the same strategy he pursued at Invesco.
questions I wanted answered were why he had decided to go it alone, and would he be able to replicate his performance at his new firm. On the first question he was somewhat cagey, saying only that he felt the structure of the firm at Invesco was not the ideal way to support a fund manager. There was too much demand on his time away from his main role, which was to run his fund. He wanted to set up a modern firm designed purely to support the manager in running the fund. To that end he has hired in several analysts who are purely dedicated to feeding him ideas for his fund. At Invesco, although there was a wider team with whom in theory he ought to be able to share ideas, he felt that in practice this did not happen as all his colleagues were busy running their own funds.
When I met Woodford a few weeks ago the two main Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the Financial Services Register under reference 452261. The FCA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission.
Investment Newsletter June 2014
Can’t see the Woodford... cont’d
For the second question, having heard how the new firm is structured, we have confidence that Woodford has probably a slightly greater chance of outperformance at the new firm than he had at Invesco. That is not to say that he will definitely outperform as even managers with outstanding track records cannot guarantee future results! We do not plan on investing in the fund, at least at the outset. For one thing, we do not like investing in funds which are experiencing big flows of money either into or out of the fund.
Another point is we are currently happy with the funds that we have in this part of the portfolio. Woodford is an outstanding manager but he is not a magician. In our experience, good performance is not usually down to individual brilliance but a strong process and having the discipline to stick to it.
Investing money comes with a cost. Stamp duty and
We invest in other funds that have an equally strong process. If we find that any of those managers are not doing what we expect then we know that Woodford could be a ready-made replacement, but for now there is no rush to invest.
There has been plenty of press coverage about the cost of the new Woodford fund.
fund might be able to react quickly to opportunities but this has greater costs.
The standard cost of the fund is 0.75% pa. Crucially, they are paying all administration costs out of this annual charge, unlike many funds. However, dealing costs do come out of the fund and, as mentioned earlier, these will impact on performance.
•
Costs of underlying investments. This is especially true of fund of funds, as the investments they hold levy their own charges.
Woodford’s fund is likely to go from £0 to over £1 billion within weeks. Given he ran over £25bn at Invesco, there is a good chance it could be much bigger.
The Fees...
dealing costs need to be paid. Investing a lot of money can cause a substantial drag on initial performance. If we are to invest we will wait a few months to see this settle down.
Hargreaves Lansdown has had plenty of publicity for being able to offer the fund at 0.6% pa. They have been offered this because Hargreaves is promoting the fund heavily. This is different from the platforms that we use that have no bias towards or against any fund but simply let us choose the right funds for our clients. In investing it is the total cost of ownership that matters. Hargreaves’ platform costs 0.45% at low end compared to Nucleus at 0.35%. This means that if investing in Woodford via Hargeaves’ you pay 1% whereas via Nucleus you pay 1.05%, only 0.05% pa difference. Total cost of ownership (TCO) is important when selecting funds, even putting aside platform costs. The TCO of a typical fund is made up of the following: •
Annual management charge (AMC). The fee taken by the fund manager for running the portfolio.
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Fund administration charges. These include charges for the trustee (such as Capita who provide this for Woodford), depositary and custodian (usually a bank).
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Trading costs. The more the fund manager trades the more this costs the investor. A high turnover
Fund charges are very difficult to work out and the total cost of ownership could be significantly higher than the headline cost. Most of the time, it is not that this is being deliberately hidden it is just that certain costs are variable. There is a current drive for more openness in the industry which is being led by the Investment Management Association (IMA) and which is to be welcomed. In my view, a sensible structure would be for all funds to publish: •
Total fixed costs which would include the AMC and fund administration charges.
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Total variable costs based on the last 12 months. This would include dealing costs and the cost of underlying investments which would vary depending on activity.
The financial services industry has come a long way in terms of transparency with initiatives such as the Retail Distribution Review and the ban on commission. However, there is still a long way to go and investors need to be very careful to ensure they know exactly what they’re paying. * With apologies to platform website the Lang Cat for blatantly stealing their headline!
Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the Financial Services Register under reference 452261. The FCA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission.
Market Views June 2014
General Economic Overview The Global economy continues to grow led by established markets with the UK at the head of the pack. Emerging market economies appear to be stabilising after a period of slowing growth. CPI inflation is below the Bank of England’s 2% target. However, RPI remains relatively high. Interest rates are likely to go up in 2015 but will do so slowly and settle at levels significantly below the typical 5% level prior to the financial crisis. Asset class key + positive - negative = neutral (normal behaviour)
+5 strongly positive -5 strongly negative
Asset Class
Score
Equity Markets We have upgraded our equity score from a -1 last month to a neutral this month, despite little movement in the FTSE. We are particularly optimistic about emerging markets and Japan which have underperformed to date. They have recently started to perform better which gives us more confidence in the 10% “neutral” expectation for equity being achieved.
=
Fixed Interest Corporate and government bonds have had a pretty good start to 2014 after a poor 2013. We believe that returns are likely to remain relatively steady over the next 12 months as even though interest rates are likely to rise they will do so slowly. We believe we could see perhaps 4% to 6% from our funds but would expect some small losses in gilts.
-1
Commercial Property Property is performing well with the improving economy supporting returns. The asset class is seeing high inflows which is positive but we are monitoring cash levels in property funds carefully. We firmly expect returns to exceed our long term 7% pa assumption over the next 18 months.
Cash With interest rates remaining at record lows, returns on cash will remain below average for the foreseeable future. Rates may increase by 0.25% early next year.
+2 -5
Balanced Asset Allocation For a typical balanced portfolio we are underweight fixed interest and overweight property, we have a roughly neutral position towards equity and alternative equity. A neutral score (=) means we expect the asset class to move in line with our long term assumptions: 10% pa for equity, 7% for property, 6% for fixed interest, 5% for commercial property, and 3% for cash. A +5 score means we think the asset class could outperform by 50% or more. A -5 means we think it could underperform by 50%. A negative score does not necessarily mean we think the asset class will fall. These represent Equilibrium’s collective views. There are no guarantees. We usually recommend holding at least some funds in all asset classes at all times and adjust weightings to reflect the above views. These are not personal recommendations so please do not take action without speaking to your adviser. Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the Financial Services Register under reference 452261. The FCA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission.