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‘Rockstar’ Fund Manager Neil Woodford Says “Investors Have Forgotten About Risk”

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Online stock trading has been an extremely profitable venture for most DIY investors over the past few years. While newspaper and specialist periodical inches have still been filled with stock market pick tips, the fact is it has been almost impossible to go wrong. Achieving anything other than strong returns when investing online since early 2016 would have to count as quite an achievement with the FTSE 100 up over 25% over the past 21 months and the FTSE 250 and All-Share indices having seen similarly powerful bull runs. Putting money into U.S. markets would have proven even more profitable, with the S&P 500 up around 60% over the past 5 years.

A debate is currently raging among industry professionals over whether equities markets are over-valued and a serious correction is impending. A significant number of investment analysts argue that the recent bull run for equities has been under-pinned by fundamentals, particularly healthily growing company revenues. The most common forward guidance coming out of the big money management companies on 2018 is that is again likely to prove a positive year for equities, albeit with the caveat that there are ‘risks’, with high valuations vulnerable to any major shock to the financial system.

In an interview with the Financial Times over the weekend, Neil Woodford, currently the highest profile fund manager in the UK and manager of the Woodford Equity Income fund which has £8 billion under management, has gone considerably further in his assessment of the risk held by 2018. Woodford has been one of the most successful fund managers in the world over the past decade and more. Against this record, his statements of equities markets currently exhibiting “echoes of the tech bubble” and that he sees “so many lights flashing red that I am losing count”, will undoubtedly cause many online stock trading investors to shift nervously in their seats.

His parallel with the ‘dotcom’ bubble of the late nineties is based on a mirroring of how the lead up to its painful pop heavily featured growth stocks significantly outperforming value stocks. With much of the recent gains, particularly over in the U.S., being driven by the big tech companies such as Alphabet, Amazon, Facebook and Apple, Woodford says the contemporary underperformance of value stocks to growth stocks is even more pronounced than it was almost two decades ago.

Woodford has particular cause to remember the dotcom bubble well. Then a manager at Invesco Perpetual, Woodford was one of the few to predict the bubble would burst and moved the assets under his management in defensive sectors such as tobacco. In the lead-up to the tech bubble finally bursting his fund was doing so poorly that it is rumoured that he was 6 months away from losing his job. He was eventually proven right and it was through that foresight that his current ‘rockstar’ fund manager status first established. Woodford repeated the trick in the build-up to the international financial crisis, shunning banking stocks.

Woodford is again pulling back to domestically-focused stocks he describes as “unfashionable, unloved and unwanted”. And his fund is again performing poorly, up 1% over two years against the FTSE 100’s 25% return. Some big investors, most notably Jupiter, have also pulled out of his fund recently, presumably on the assumption that he is missing out on returns by being too conservative.

He’s again convinced his investment strategy will pay off in the end when the ‘bubble bursts’, citing the stance that “Investors have forgotten about risk and this is playing out in inflated asset prices and valuations.”

Will Woodford be proven right a third time?

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Paul

The author Paul