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Criticism does hurt me, says Neil Woodford

by Citywire Jul 04, 2017 at 14:23

 

This is a 16-minute video. Can’t watch now? Read the transcript

Lawrence Lever: Neil, thanks for coming in.

Neil Woodford: It’s a pleasure.

LL: In our database you’ve performed extremely well, but like lots of managers you know, there’s a myth of the kind of consistent manager that can do it year in, year out in any market conditions. I’ve noticed, because I do my research, that over the last 18 months there have been one or two people picking out ‘mistakes’, the sort of things that have gone wrong. Does the criticism bother you? How do you respond to mistakes? Or, how do you deal with things when things aren’t going your way? What’s your response?

NW: I think the first point to make is that if you are an active manager and you’re doing things differently, you are by definition going to go through periods of underperformance. You have to know what you believe in and you have to know why you’ve done the things that you’ve done. And not be vulnerable to criticism or frankly acclaim either. You have to be able to rely on the methodology that you’ve deployed, test it all the time, make sure your hypothesis is still giving you the same answers. Rely on your investment anchors is how I would describe it really, not be deflected by criticism which can be ill informed or unwarranted.

LL: Does it hurt you?

NW: Yeh it does, I’m not immune to it. Of course it frustrates me. Often because it is ill informed and it is so short term. And we have a predisposition in this country I think, to want to be critical about things before we sort of … before we see the positive side. And to some extent, it doesn’t really matter, I mean you know to some extent if you have been in this game as long as I have, to some extent it’s water off a duck’s back. But I sort of worry a bit more about some of the young companies that we’ve invested in. Because when the world is very critical about one or two things that have gone wrong in a portfolio. You know, I’m not the only one who is aware of that, lots of the young businesses that we’ve invested in are equally aware of that criticism. And I think it can sometimes rub off on them. Now I think that’s where it can do real damage if it’s not well thought through and not well-founded criticism. So, I’m not immune to it, it does sort of, hurt, I have to say it hurts.

LL: Do you lose sleep over it?

NW: I do yeh. I don’t sleep well when things are not going well.

LL: Don’t you?

NW: No, I don’t no! And I can be un-nerved by some very silly things that take place in the short term. It’s remarkable that even after all these years when I’ve developed that long-term philosophy and it infuses everything I do, that I still am affected by the day-to-day slings and arrows of the market and the criticism that comes with the day-to-day things that go wrong.

LL: Like all good fund managers, you’re bound to make mistakes. I was talking to a chief investment officer who said that really good fund managers, you know they’ll get 55% of the decisions right, therefore 45% wrong. So how do you respond to mistakes?

NW: Well you’ve got to learn from your mistakes. Whether in sport, in business, in fund management, you’ll always learn more, I think, from things that have not gone well than you learn from things that have gone well.

LL: So can you give me an example of a mistake you made and how you learned from it and what you then went on to do differently as a result?

NW: Well it’s hard to single out any one event and say that was my learning from that event. It’s a very subtle and a cumulative thing. I would say that perhaps the most searing sort of investment period in my life was the tech bubble really. You know I was out of step with what the market wanted to do for a protracted period of time. People were making a lot of money in the market and things were going very swimmingly well for most investors. And I sort of stepped away from that, thought it was flawed, didn’t buy into the rhetoric or the philosophy and was criticised loud and clear for doing that. Eventually it came right in early 2000 and I would say that experience has sort of been a very important one for me in my career.

LL: Did it give you more confidence?

NW: Yeh, I think it gave me the confidence to back my judgement and not to be vulnerable to the noise and the mayhem that the stock market will fire at you.

LL: So what would you do, would you go back over the accounts or back over the valuations and just confirm to yourself that the valuations were too stretched?

NW: Yes.

LL: Is that the sort of thing you would do? Do the work again?

NW: Do the work again. Do the valuation work again.

LL: So the numbers provide you the reassurance.

NW: Yes, the number and the judgements. Because valuation is not a science. It’s part calculation, it’s part number crunching but it’s equally also judgement. Judgement based on experience, history. Those ... it’s skill, to some extent. And it’s important to rely on those things as much as it is to rely on the numbers.

LL: Now in the past I used to know Bob Yerbury [former chief investment officer at Invesco Perpetual and Woodford’s boss]. Lovely man and he’d talk about you every now and again, and you know when you were going through a poor period or when things weren’t going so well he’d say he’d come into the room with you and you’d have a chat and then you would explain what you were doing. And he’d leave the room thinking yes Neil does it, yes Neil he totally accepts that and he really believed in you. I just wonder, one of the things that has occurred to me, you run your own business now. Do you have a Bob Yerbury kind of figure to be able to test stuff on? Because I do think, I’ve got a mentor who is 20 years older than me. I find that very useful and important. Do you still have a character like that to help you?

NW: Not really, no. I haven’t got a Bob Yerbury.

LL: You smiled when I mentioned his name.

NW: Yeh, well I worked with Bob for many, many years and we spoke about investment issues all the time, both when he was an active US fund manager and indeed when he became CIO [chief investment officer]. He along with other people ..

LL: Ed Burke [former UK fund manager at Invesco Perpetual] I remember.

NW: Yes Ed was very influential on me. I have … He’s probably someone I still miss. For his investment insights and his investment view. I think he was one of the brightest people I’ve ever come across in our industry.

LL: You don’t consult these people anymore?

NW: Well not really. But there are lots of other people that have sort of filled that gap. People I’ve known for 30 years in this industry are people I bounce my ideas off, whose opinions I respect and who I listen intently to.

LL: So what do you do outside of work to switch off?

NW: Well I’ve got a young family. I’ve two young children who keep me grounded. I have hobbies that I pursue that I really enjoy.

LL: eg?

NW: Well I enjoy remaining relatively fit but my hobby really is equestrian sport. It’s a relatively new hobby for me. I learned to ride when I was 49 and I now compete in sort of low-level eventing.

LL: Jumping?

NW: It’s dressage, show jumping and cross-country as well so three disciplines and I enjoy that very much. That is something that switches me off.

LL: Scared? Do you find it scary?

NW: No, not really.

LL: Have you ever fallen off the horse?

NW: I’ve fallen off far too many times. I think you have to if you are learning a new skill like that. I mean to start with I was not very good and I fell off reasonably frequently. Now I fall off less regularly. If you wear the right equipment then that’s not too dangerous. I’ve had one or two injuries as a result of falling off but I have a great horse now and it’s a great sport, it’s a fantastic sport, it’s exhilarating. In a way when I stopped playing rugby I really missed the team thing. I did a lot of individual things after that that I sort of enjoyed but I missed that team aspect to what I was doing. So weirdly equestrianism is a team event. It’s you and an animal, not a human, it’s an animal. And you have to build a relationship with an animal and that’s a really interesting challenge. When you’ve built that partnership, it is remarkable how in tune you both are. Your horse and your performance.

LL: So it’s instinctual.

NW: It is to some extent yeh, but you train those instincts I think.

LL: One of the things is your name is on the door. Ok your name is on the door. And your name and reputation are kind of synonymous as far as I can see. So when Woodford Investment Management does something, whether it was done by you or somebody else who works for you, it’s kind of you. So I wonder does that have any impact on you at all? And your ability to delegate decisions to others, for example. Because everything is going to be your name.

NW: Yes, so far as investment decisions are concerned I am the trigger puller at Woodford. I own all the investment decisions. The fact that those investment decisions have been informed by my colleagues who have expressed their views and done lots of work to help me make those decisions. Ultimately, the fact is my name is on the door and I’m the trigger puller and I bear the responsibility. So when things go wrong it is not members of my team who are in the firing line it’s me and that’s exactly as it should be. So I am very conscious of that. It could inhibit you, I think. Because we’re very transparent, because we’ve tried to be very open with our investors. We’ve explained to people. First of all we tell them exactly what we’re doing with their money and we explain why we’ve changed things. And that transparency brings an additional burden with it. Because everybody is poking a finger at you saying why did you do this, you got that wrong, and that’s awful isn’t it? You know, it’s quite a tough place to be but we embarked on that knowing that would come with the transparency.

LL: The thing about you Neil is that I see that you have done amazingly well, often seeing a truth that other people don’t see. You know we talked about the tech, we could talk about the banks, for example. Everyone is buying the banks, high yield all of that, you didn’t like the way they were run. So I just wonder whether you prefer – what do you get more buzz out of, seeing a truth in those large cap sector decisions or investing in the small-cap, unquoted where your involvement is often crucial to those companies.

NW: Yeh, I enjoy both bits. I’m very engaged in what we’re doing in the early-stage portfolio, I think it’s incredibly exciting. And it’s a privilege frankly to be involved with technology that we believe will change the world, will change the way we behave, solving some of the really intractable problems that human kind now faces whether it’s related to the climate, whether it’s related to health or degenerative brain disorders or cancer. There are lots of bits of technology that we are investing in that we think will have a profound impact on some of these challenging issues. So it’s an incredibly exciting thing to be doing. But equally I am very aware that what drives that behaviour, what drives that activity is our desire to deliver attractive returns to investors. And we think we will be able to do that and are doing that by capturing the opportunity in those sorts of businesses. But equally I’m very excited about what we’re doing in established, large businesses too. But I often find that what I do is contrarian because I am driven always by valuation disciplines and it is so often the case that the market loves things that are expensive and abhors things that are cheap. For all sorts of psychological and established reasons. The market is naturally a momentum-type investor. And I am the very opposite. So that’s why I often find is that what I do is out of the mainstream.

LL: Are tracker funds your friends?

NW: They have an important role to play. I think we need to be vigilant because of course active investors – you know there is a certain amount of piggy-backing on active fund management. Active managers ultimately establish valuation and should establish valuation in – passive investors are not really, they’re valuation insensitive investors and therefore to some extent they are pregnant with danger ultimately if they become too big in the stock market. So I think they have an important role to play for investors. Obviously they provide a relatively cheap way for investors to participate in the growth of the economy but I think we have to be very aware of the impact that the growth of passive will have on asset price valuations, on corporate governance as well, for example.

LL: You’re 57 right?

NW: Yes.

LL: I’m 59 you know. We can’t continue on indefinitely so I guess the question is how much longer are you going to do it for and what happens in terms of the business if you’re no longer the principal bloke running it? So let’s start with the first one, how long are you going to keep going for?

NW: I don’t know. Our business is three years old. I feel I am at the start of something, by no means near the middle or near the end. A business has been born, we’ve put our heart and soul into that business and we are very ambitious for what we can do. We’ve already achieved a lot in the first three years.

LL: Yeh, something occurred to me. You’re already a wealthy bloke so I can’t believe the motivation is really about making more money.

NW: No, I’m probably not as wealthy as you think I am. But we didn’t do this... If money is the motivation in anything I think, you know, beware. I think it probably is a false motivation. You should be very careful because if it were, it would encourage you to do all sorts of inappropriate things. We’re motivated to build a genuinely disruptive business that does the right thing for our investor base.

LL: So ok, you’re planning to keep on going …?

NW: Well, not indefinitely of course.

LL: What happens when you’re not there Neil, because this is a business that’s very identified with you?

NW: It is ..

LL: And you haven’t hired any big name fund managers.

NW: No.

LL: I don’t know if that’s part of your plan.

NW: Craig [Craig Newman, chief executive of Woodford Investment Management) and I have kissed a lot of frogs over the last three years. We’ve interviewed lots of people. I have an investment team of seven people. I have some very, very able people around me helping me do what I do. Craig and I have looked at all sorts of different options over the last three years and we will continue to do so. But what’s really important to us is the foundations of our business, our culture, the way we do things and we’ll never, never sacrifice that.

LL: Great, Neil, thanks very much.

NW: Great to see you, thanks.

Star fund manager Neil Woodford popped into Citywire last week for a video interview with our executive chairman Lawrence Lever.

Lawrence recalled our first major interview with Woodford in October 2001 when he revealed the pressure he had been put under – and resisted – to buy tech stocks in the dot com boom. His funds plunged to the bottom of the Equity Income league table.

He was vilified in the press, accused of being intransigent, blinkered by pride and off the pace. Sticking to his guns, he was proved right.

Fast forward sixteen years and Woodford is again attracting flak. This time for the difficulties some of his unquoted investments have got into and even some of his large company bets – such as Provident Financial (PFG), Next (NXT) and Capita (CPI) – have suffered share price falls. Again the critics are out.

While his flagship £10 billion Woodford Equity Income fund is top of its sector since launch in June 2014, it has lagged over the past eighteen months. Is this far too short a time period to judge Woodford, a man who has delivered over the long term as our chart of his individual performance since Citywire started collected fund manager data in November 1999 shows?

Meanwhile, after its record launch, shares in his £800 million Woodford Patient Capital Trust (WPCT) remain below the price at which they floated at two years ago.

The criticism hurts and he loses sleep when things are not going his way, he says. But he is not going to be deflected from his core value-driven investment philosophy.

There are legitimate questions around Woodford – covered in the video interview.

Has he moved too far away from what he built his reputation on – UK large company sector bets?

Is it different now that he doesn’t have available some of his Invesco Perpetual mentors?

Does having his own name on the door of his firm mean it is hard to delegate decisions? And why did he turn to equestrianism, at the age of 49?

Watch the video to find out.

Postscript:

In the interview Woodford refers to three significant people in his career. They are Bob Yerbury, Neil’s former boss and chief investment officer at Invesco Perpetual; Ed Burke, former UK fund manager and colleague of Neil’s at Invesco Perpetual; and Craig Newman, chief executive fficer of his new firm, Woodford Investment Management.

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Comments  (17)

  • William Phillips: 

    Where is the link to the transcript?

    11:11 on 05 July 2017

  • Tony Peterson: 

    Poor Neil.

    Does not his cut of that £10 billion fund allow him to sleep far more soundly than most? Funny the things that can keep you awake if you have a thin skin.

    I simply note that the impressive looking graph of his funds' performance since 1999 annualises at about 10% pa. Looks good, but it's pathetic. By being my own fund manager I've been annualising over 17% since 1975. Rather more since the credit crunch. And the average manager cannot even get to 7% pa!!

    No wonder Gina Miller expresses concern about the level of offtakes within the financial services "industry". When are your readers going to wake up to the fact that they are giving about half of their potential profit away if they entrust the whizz kids of that industry with the surplus earned by their hard work?

    Be your own fund managers. It is so easy. (I've had a very good day too).

    18:40 on 05 July 2017

  • chubby bunny: 

    @William Philips - Click the 'Show press release' button.

    19:34 on 05 July 2017

  • William Phillips: 

    Thank you. I assumed 'press release' would only be a potted version of the talk.

    12:34 on 06 July 2017

  • LEICESTER VESTOR: 

    Three cheers for you Tony Peterson ,

    Your stated investment record shows that you believe in your conviction and your investment decisions have paid you handsomely over that period. I am ready to admit that floaters like me have not done so admirably as one would wish . I am one of those who switched between equities direct investments and fund managers and have suffered substantial losses both in funds and my own investment choices and one of the biggest loss makers in SIPP and fund portfolios has been WPCF.

    Which according to my conviction

    will still be a winner in the long run . However I had misjudged the time scale for the fund and have not been patient enough as the fund's name suggested and had to liquidate most of my investments , many at a loss due to change in my retirement issues . However my views are still unchanged and I think direct investments versus fund investments both have a place in the investment world , But the proportion of the investment mix percentages

    will depend of each individual's choices and the market's know how of that individual.

    But as I said earlier , Your conviction and investment ideology and choices are worth praising and appreciated .

    12:54 on 07 July 2017

  • Jim Thompson: 

    Thanks to Citywire and to Neil. I enjoyed watching the extended video.

    14:39 on 07 July 2017

  • John Gardiner: 

    I agree and have over many years with Tony Peterson that the only way to make real money is to be your own Fund Manager and FSA.

    I have been investing since 1966 and have had comfortable double digit growth for almost each year and an annual income of no less than 7.5% for many years.

    The only irritant is that thanks to George Osbourne my tax take has increased considerably due to the cancellation of the 10% tax credit!!

    09:25 on 08 July 2017

  • Gordon Stewart: 

    When Tony Peterson starts a fund I will certainly invest in it !

    09:31 on 08 July 2017

  • Mikesmusing: 

    17% a year for 42 years. Wow. So that initial £1000 is now worth £730,000. And £1000 invested for each of the last 42 years is now worth £4.3 million. Nice, but simple?

    10:10 on 08 July 2017

  • Franco: 

    Woodford is a giant among pygmies

    11:55 on 08 July 2017

  • Mark Stringer: 

    Tony Peterson, Any chance that self server, gina miller could not be mentioned please.

    These 'whizz kids' are like all so called 'whizz kids' in all industries, it essentially is a closed shop monopoly run by cowboys.

    12:18 on 08 July 2017

  • King Lodos: 

    I'd recommend healthy skepticism over Tony P's accuracy in calculating his own returns .. Are they time-weighted returns, dollar-weighted, how does he calculate the effect of withdrawals and inflows (both of which are timing issues)?

    I think the fairest way a DIY investor can calculate their own returns is just to calculate their net worth – and consider every aspect of your life an asset or a liability .. There's no glory in achieving great returns when you have only £5k invested, and doing very poorly when you've sold your house and invested the proceeds.

    If Tony's claims are correct, the biggest mistake he's ever made is not becoming a professional fund manager .. Monkeys can pick stocks better than the market – but any monkey knows you make more money managing other people's monkey .. Statistically, most traders and investors think they do far better than they actually do .. The average return is the market return minus all the fees.

    10:38 on 09 July 2017

  • King Lodos: 

    ^ let's say I used one incidence of "monkey" up there are slang for "money".

    10:39 on 09 July 2017

  • John Gardiner: 

    It's a question of common sense and spending a lot of time being a "self" investor, "King Lodos".

    And, after more than 50 years of investing suchlike you develop a hunch and stick with it. I also keep my investing very simple.

    For instance I bought heavily into British American Tobacco back in 1998 when I was paying less than two pounds per share. The shares are now well over fifty pounds each and my income from that holding alone is absolutely phenomenal.

    You have to make sure that your winners pay for your losers with more besides. It just takes courage and that inner gut feeling when heavily investing in a particular stock. Likewise having spent a most enjoyable holiday in Italy in 1994 with a director of Halma, I bought very heavily into that company. What an amazing investment.

    Be your own boss and have the guts of your convictions.

    10:56 on 09 July 2017

  • King Lodos: 

    It is, but it's also a fact that on the end of every seller is a buyer – for everyone making a good trade, there's someone making a bad one – and therefore in order to beat the market collectively, you have to be smarter or luckier than the market collectively.

    The classic economics class example is you get all the students in class to guess how many beans are in a jar .. No one gets it right, but the mean average guess is typically closer than all buy 1 or 2 students .. Beating the market isn't just a matter of being better than average – alpha is very unevenly distributed.

    The two problems in practice are that most people are very poor at calculating their actual returns (e.g. most traders think they make money, but trading sites will tell you – factually – about 90-95% lose after fees), or if you happened to get rich off one or two great stocks in a very concentrated portfolio, you probably don't appreciate how much of that was down to luck.

    13:08 on 09 July 2017

  • Mark Stringer: 

    Without a shadow of a doubt I have been lucky in trading patterns of the few (relative to many) shares I trade a year. Boohoo,BT,Lloyds, Burford Capital mainly plus a few IPO's for the initial surge, but limited due to initial allocation restrictions. This year I could not lose,so far!

    I'm waiting now for my next trade as I cannot see any patterns at all and without any doubt I am ahead including the stamp duty and fees.

    If I was a frequent trader I am sure I would not be so happy with my performance and now have upped the value of my trades to, I hope, increase returns.

    I have been singed a few times with BT and Lloyds but not enough to dent my returns overall.

    I guess caution has both restricted growth but also helped it in equal measures.

    10:55 on 10 July 2017

  • Jon Page: 

    I'm with Lodos. Most people dont have the time or training to properly analyse businesses or to determine what the "fair price" should be and thus whether its cheap or expensive, or to estimate the anticipated future profits. This is something for the experts generally.

    Further suggesting people should go with "hunch" investing is just downright crazy. Like betting on a horse because the rider has a nice green jacket! Utter Nonsence.

    Most punters would be best advised to pool their hard-earned with a select bunch of managers with a decent track record.

    Only exception would be those rich enough that it really doesn't matter anyway what return they get. Unfortunately there are not many of us in that boat, maybe Tony is. Maybe he isnt.

    22:21 on 26 July 2017

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