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Neil Woodford: stock markets are flashing red

Neil Woodford: stock markets are flashing red

by Dylan Lobo Dec 01, 2017 at 09:24

Neil Woodford believes stock markets are in bubble territory, which has created an opportunity he has only seen a handful of times in his career. 

'Ten years on from the global financial crisis, we are witnessing the product of the biggest monetary policy experiment in history. Investors have forgotten about risk and this is playing out in inflated asset prices and inflated valuations,' Woodford said. 

'Whether it’s Bitcoin going through $10,000, European junk bonds yielding less than US treasuries, historic low levels of volatility or triple- leveraged ETFs attracting gigantic inflows – there are so many lights flashing red that I am losing count.'

Woodford said stock valuations had increasingly concerned him over the last couple of years, with the difference between the performance of value and growth stocks greater than at any stage in stock market history.

Woodford is currently enduring one of the most difficult periods in his fund management career following a number of well-publicised stock problems, including Capita and Provident Financial.

His flagship Woodford Income fund is near the bottom of its peer group over one year, returning just 2% versus the peer group average of 11.5%.

While at Invesco Perpetual, Woodford famously stayed clear of tech stocks during the dotcom bubble in the nineties and he draws comparisons between then and now.  

'Obviously, the late nineties dotcom bubble was a painful period of performance for me – its impact on valuation stretch is all to visibly acute on the chart but, in the context of history, it was a brief dislocation,' Woodford said. 

'[But] By focusing resolutely on fundamentals, my funds enjoyed a meaningful period of positive performance when the bubble burst, continuing to rise in value as the market plummeted in 2000 and 2001.'

Woodford pointed out that during the dotcom bubble it was old economy stocks that were hit, while today it is domestically-focused stocks which have become profoundly unloved and undervalued.

'The funds I manage are positioned to exploit this opportunity and I am utterly convinced it will pay-off when the bubble bursts, which I believe it inevitably will,' he said. 

While there are echoes of the tech bubble today, he feels the current climate is perhaps more akin to the 'nifty-fifty bubble' which afflicted stock markets in the late 1960s and early 1970s.

'A narrow group of so-called “one-decision” stocks with dependable growth characteristics enjoyed a run of popularity with investors that took their valuations to extreme, unsustainable levels,' Woodford said. 

'In a challenging global economic environment, the few stocks that are perceived to be capable of delivering dependable growth have, like in the early-1970s, become very popular but that popularity has manifested itself in extreme and unsustainable valuations.'

He added: 'A consistent feature of bubbles is that here is always a subset of the market which falls out of favour as investors clamour for the fashionable stocks of the day, providing the fuel to power the bubble on through the final leg of its journey before it bursts.'

Woodford accepts timing of such an event is not easy, but notes there are certain events on the horizon that could prompt the market to acknowledge that some parts of the global growth outlook are nowhere near as benign as it has complacently believed.

'Investors should be careful chasing the zeitgeist. The temptations and excesses are right here, right now.

'There is always risk when markets become obsessed and extreme but there is also opportunity – an opportunity to capture assets at incredibly depressed valuations, the likes of which I have only seen two or three times during my 30-year career.'

 

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Comments  (24)

  • Micawber: 

    He's making a very heavy bet that 1. Brexit will go well 2. Labour will not take office and 3. UK 'old economy' stocks will not be dragged down in any worldwide equity bubble-popping. And he's utterly convinced he's right.

    Dangerous, I'd say.

    09:59 on 01 December 2017

  • richard tomkin: 

    The red lights have already been flashing for some of Mr Woodford's shares ; if a general decline takes place,it would make it seem not so bad.

    12:28 on 01 December 2017

  • Know-it-all: 

    The article's assertion that he stayed clear of tech stocks before the Dotcom bubble doesn't square with my memory of events at the time.

    16:51 on 01 December 2017

  • Stephen Tiley / PensionsManager: 

    As he was running income funds he purposefully avoided shares paying no dividend. This helped him avoid many of the internet stocks etc. His performance was bad in the run up to the dot com crash and great afterwards compared to the broader market index.

    17:26 on 01 December 2017

  • SDRL: 

    If he is a fortune teller why is he doing so poorly with his fund lately?

    18:20 on 01 December 2017

  • Greyinvestor: 

    I guess Mr. Woodford must have made a decent amount of money so I hope he retires gracefully now before his reputation is further damaged by speculating about stock market crashes.

    19:10 on 01 December 2017

  • richard tomkin: 

    Shades of Anthony Bolton,who suffered a torrid time in China in his pre-retirement,trying to stock pick.

    19:29 on 01 December 2017

  • Mark Yu: 

    It is ironic that he is thinking now some of the shares are in bubble territory. What about his own pickings like allied minds and IP group, out of many other similar ones (spher, rene, rm2, oxp, cir etc come to mind in a flash), which are now worth a fraction of what he paid for over two years ago. Surely he was buying a lot of much bigger bubbles when he constructed the wpct portifolios..

    19:48 on 01 December 2017

  • Capt Ahab: 

    Ye Gods. W will see!!

    21:58 on 01 December 2017

  • BOB 2: 

    it's knowing when your streak of good luck and judgment has come to a end

    everything runs in cycles , and it looks like his has come to a end. it must be

    a bit of a night mare for him now, when not much is going right. but you never know Trump managed it with a bit of help from his family .

    23:20 on 01 December 2017

  • Sage: 

    So the markets are defined by the esoteric bitcoin and European junk bond yields. Nothing to with corporate profitability, rising GDP in America, financial restructuring in Japan, technological development, re capitalisation of banks and President Trump's tax cuts.

    Mr Woodford should spend more time studying Company accounts than pontificating on obscure financial instruments, perhaps then the performance of his funds may improve.

    07:43 on 02 December 2017

  • Mark Stringer: 

    Not quite sure why so much angst towards Woodford. Sure he hasn’t performed the way his over hyped (by journos) reputation suggests he should have, but in case no one noticed the fund; wpct indicates long term returns if it actuallly achieves a return. Long term? How long’s a piece of string?

    I wonder if perhaps Woodford has touched a nerve with some.

    There is no doubt that a bubble exists surely. The artificial environment created by the debt mountain must be keeping many companies running on vapours alone along with what passes for the economy generally. We’ll no doubt find out in the next 12 months.

    Bitcoin IS bull manure in its purest form, the tech revolution of paying sod all tax, no divis,destroying markets with the “cost of everything and value of sod all” mantra and touting a revolution that will never happen in my lifetime (Tesla) needing to use more carbon per vehicle to create and run an electric car than petrol would!

    How many profit warnings so far this year? Divi payers dropping like 9 pins and a housing market both subsidised by the help to buy nonsense and also trapping downsizers who are now forced to compete with first time buyers.

    The whole economy is skewed by debt and that cow Thatchers policies and Bliar/Broon’s tenure and the markets are high.

    As sure as night follows day bust follows boom. Let’s see if Woodford adding his voice to the list is right.

    09:31 on 02 December 2017

  • Dennis .: 

    Oh I thought he worked for HL these days, judging by the fact that he is still in the HL150.

    09:39 on 02 December 2017

  • Tyrion Lannister: 

    For several reasons, I have no confidence whatsoever in WPCT or the Woodford Equity Income fund.

    The income focus fund though might at least deliver the 5% Income he promises and it might prove to be a good defensive fund if there is a crash. For these reasons I invested 3% of my portfolio in it and lost 3% almost immediately. :) I am going to hold on though, you never know he might prove to be the investment messiah after all. Personally I doubt it, I think luck has played a big part in his previous success.

    I’m behaving illogically because I’ve invested purely in the name/ brand. Given a similar underperformance from most other fund managers I would’ve stayed well clear. I suspect I’m not alone in this but unlike many others I’m prepared to admit it!

    01:35 on 03 December 2017

  • Capt Ahab: 

    You are not alone!!

    07:38 on 03 December 2017

  • Dennis .: 

    It's like a rerun of Antony Bolton and Fidelity. The lesson is don't buy on the name only. Even Terry Smith is having problems with his FEET fund whilst his Equity Fund powers ahead.

    19:02 on 03 December 2017

  • Tyrion Lannister: 

    Dennis, you’re absolutely right.

    The thing with Woodford is that his previous success has come from investing in established companies with his focus being generating income.

    It seems to me that his interest in young high tech companies is no more than a hobby horse for him but he’s out of his depth. That’s the main reason I’ve stayed clear of WPCT and the Equity income fund. The income focus fund though is pretty much back to basics for him.

    Imo FEET is in a similar situation to WPCT in that Smith has moved out of his comfort zone and out of his depth, if botth Woodford and Smith would stick to their strengths, their investors would be much better off.

    00:16 on 04 December 2017

  • Mr Helpful: 

    @Tyrion

    Your summary seems spot on !!!

    "The thing with Woodford is that his previous success has come from investing in established companies with his focus being generating income.

    It seems to me that his interest in young high tech companies is no more than a hobby horse for him but he’s out of his depth. "

    Let's also be grateful we are not forced to publish our own portfolio performances. !!!

    10:53 on 04 December 2017

  • normski 2nd: 

    Good morning,

    The problem with all the established companies is that they are more or less all fully valued and the managers now try to find something new and very profitable.

    11:51 on 04 December 2017

  • SDRL: 

    "Let's also be grateful we are not forced to publish our own portfolio performances. !!!"

    I am grateful that I am doing better than he is in this bull market. Woodford trades too much.

    12:03 on 04 December 2017

  • Mark Stringer: 

    I would be happy to publish with others my own performance in what I laughingly refer to as my "portfolio". It's a bit like using your own name by formal registration of utility bill, passport etc.

    I'm not paying anyone other than the broker for being a middleman.

    Still, I don't see what is so clever about buying at issue or early stage then holding long term.

    Surely, fund managers are paid to manage and profit and if anything the past few years have lent themselves to frequent activity by a manager. Income is probably different matter but not all are buying for income except by way of turning a quick profit (or loss).

    Why can't these managers trade more frequently if their performance is little better than very, very, many others who take the traditional approach.

    If nothing else the dire performance of managers generally almost begs for a change for someone who is sharp.

    13:43 on 04 December 2017

  • Capt Ahab: 

    Day after day of this flashing red business, it will be interesting to see whether he is right or wrong. Watch that space.

    13:51 on 04 December 2017

  • richard tomkin: 

    In my opinion frequent traders are those sort of people whom Oscar Wilde so lampooned,as knowing the price of everything and the value of nothing.It is quite distinct from investing ( and a good deal less effective )

    15:54 on 04 December 2017

  • Sage: 

    Interestingly, Sir Jon Cunliffe, Deputy Governor of the Bank of England, has just stated that the Bitcoin market bubble is not big enough to unsettle the economy.

    In the meantime, Mr Woodford who has the largest stake in Countryside Properties has seen the share price fall by 7% in the last few days. Another one to add to the list of AstraZeneca, Allied Minds, Imperial Tobacco, the AA and Provident Financial.

    Perhaps his comments are more to do with the stopping of the withdrawal of funds from his WPCT and the Woodford Equity Income Funds than anything else.

    19:27 on 04 December 2017

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