Woodford: ‘2016 has been a disappointing year’

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Neil Woodford says he is disappointed with the UK Equity Income fund’s performance in 2016 as it failed to achieve the high single digit returns it had been aiming for.

The fund returned 3.3 per cent for the one-year period ended 31 December compared to 16.8 per cent in the FTSE All Share. The previous year it had delivered a more exceptional 16.3 per cent compared to 1 per cent in the All Share.

The fund’s lack of exposure to oil and gas is partly behind the underperformance.

Last year Hargreaves Lansdown reported the fund was set to fall out of the UK Equity Income sector if it did not change its investment approach.

“2016 has been a disappointing year from a performance point of view,” Woodford says in a video posted on the company’s website.

“We were in a very momentum-driven stock market. Whenever that happens, it puts enormous pressure on fund managers. Not least because so many of us are in an industry that requires performance to be delivered continually. And that’s not possible in my view if you’re going to add value in the long term.”

Woodford, who says he recognises that clients’ resolve has been tested over the last year, lists Capita and Next as stocks that did not perform as he had hoped in 2016.

The lack of attention paid to fundamentals by the market reminds Woodford of the dot com bubble. “There was no price people wouldn’t pay to be invested in the technology sector and no price they wouldn’t sell stocks from the old economy.”

Head of investment communications Mitchell Fraser-Jones says the market has overreacted to profit warnings from Capita and the team is prepared to be patient with the stock. It more than halved over the course of the year.

“It is essential that one does not compound the impact of a fundamental disappointment through an emotional reaction to a share price fall,” Fraser-Jones says.

Within oil and gas, Fraser-Jones says they remain convinced that fundamental do not justify prices.

“Perhaps these sectors (and the commodity prices upon which they depend) fell further than they needed to in 2015 but the recovery since then, in our view, goes way beyond what fundamentals would justify, particularly when you consider that many key commodities remain structurally oversupplied and the global demand outlook is still very poor.”

Fraser-Jones points out that the PE ratio of Royal Dutch Shell has more than doubled from 12x earnings to 27x.

He says the investment team remains committed to healthcare. “We see a lot of value being stored up in the sector and there are some very promising drugs coming through from the pipelines of both small biotech and large pharma companies. Going forward, as a result of the market’s failure to acknowledge this progress over the last eighteen months, it is plausible that value starts to be recognised in the form of more M&A activity in 2017.”

Hargreaves Lansdown head of investment research Mark Dampier says he continues to have faith in Woodford as a manager.

It is, in my view, impossible for a truly active manager to outperform in every period, and this shows the benefit of having a broad and diversified portfolio.

“Woodford is a high conviction, long term investor and like other managers, he will undergo periods where his style is out of favour and we will see underperformance testing his and investor’s resolve.”