Lee Wild, interactive investor:
Neil Woodford, thank you very much for joining us today. You’ve taken some criticism for your fund’s recent underperformance. How do you cope with that personally?
Neil Woodford, fund manager, Woodford Investment Management:
You have to be resilient, I think. We have rightly been criticised for short term performance. It’s been quite a hostile environment. We’ve responded to that criticism by being very open and transparent and communicating well with our clients. Trying to help them understand why we’ve under-performed, what the environment is, what’s caused that underperformance, so they can put it into context.
It’s easy, I think, and the temptation is to hide in your shell and hope it all goes away. But we have an obligation to communicate with our clients. We set the business up to be open and transparent and I think we are, despite the difficult environment we’re in at the moment, fulfilling that duty.
Lee Wild: Can you explain the investment process, just so we and our viewers can understand why you continue to hold stock such as Capita (CPI)and Provident Financial (PFG)?
Neil Woodford: My investment process is founded on the analysis of the economy and the businesses that operate within it that populate my investment universe. My approach has always been focused on what we call fundamentals. The reality of the world that we live in and the businesses that operate within it.
All the while, the object of my analysis is to try and understand what the fundamental value of a business is and should be, not just today, but going forward, and then compare that with the share price of that particular business. Where anomalies exist between those two things, where value is much higher than the share price, obviously that looks like an interesting investment. And where the value is significant below share price, obviously you want to run a mile from something like that.
So, all the while, my research and my whole investment effort is focused on understanding the anomalies that exist between value and share price, and exploiting them to the long-term benefit of our investors.
Now, from time to time, that focus on fundamentals becomes what appears to be completely irrelevant, because the market becomes detached from fundamentals and focuses on momentum and all sorts of other things that have nothing to do with the real world. And I think we’re going through a period like that now.
My investment anchor throughout my 30-year career in investing has been focused on sticking to those fundamental principles. And I think it’s that that has served my investors well over the years and will continue to serve them well in the future.
Lee Wild: Do you ever question your strategy?
Neil Woodford: I focus on the fundamentals of the economy and the businesses that I invest in and, indeed, the ones that I don’t. By that, I mean I analyse, I spend a lot of time analysing what’s really happening in the real world, what’s happening at a whole economy level and what’s happening in the businesses that we can investment in across my investment universe.
What that process informs is a sort of valuation perspective. So, what I’m trying to do by analysing the economy and analysing business is trying to understand what the right value for a business is today and what it’s likely to be in the future. Of course, once you have established how a business should be valued, you can compare that with the share price of that business and make an investment decision. When value is above share price, you’ve got an attractive investment opportunity. And when value is below share price, then you want to avoid that particular investment.
So, my investment process is always driven by that fundamental approach of trying to establish what the right value of a business is. That’s my approach. All of my investment decisions are informed by the iteration of that. We don’t just analyse the business, decide to invest in it and then just park it. The process is informed all the while by a dynamic world and a dynamic business environment. So things are changing all the while and you have to input all of those changes into your valuation model and your valuation conclusion.
So that’s how my investment process works, and my portfolio selections are driven by that process, which produces an answer to the question, “Where are the best investment opportunities in my investment universe?” And that’s where the portfolio gets positioned.
That’s the process, that’s the strategy. It sort of answers really the question of why do you own Capita and Provident Financial after they’ve had disappointments and severe share price falls. The answer to that question is because I think the fundamental value today is profoundly higher than the current share price and that’s why I continue to own them.
Lee Wild: Do you regret your decision to be very transparent? It’s very noble and investors will appreciate it, but sometimes it can be a double-edged sword perhaps. Is this the right approach?
Neil Woodford: We think investors have a right to know what fund managers are doing with their money. And that was what guided us in the first place to be open and transparent about what we’re doing with our clients’ money. Sometimes, given the amount of attention that’s focused on what we’re doing and the things that have gone wrong, more than the things that have gone well, creates a very hostile environment that is hard to resist sometimes. It makes our life more difficult actually.
And sometimes I’ve asked myself, “Do our investors value our openness and transparency?” It’s not immediately obvious sometimes that they do. But Craig [chief executive, Woodford Investment Management] and I are robust. I am a robust fund manager. I have had to put up with this before. Maybe not quite to the same intensity as we’ve witnessed recently.
But the founding principles, the principles that drove us to be open and transparent in the first place, are ones that continue to inform that debate really. We still think it’s the right thing to do to inform our clients. What we will always do though is always measure that against our clients’ benefit or disbenefit.
So if we ever believed that being open and transparent was actually harming their interests, then I think we would rethink that process. But for the time being, we think they deserve to know what we’re doing with their money and we want to tell them.
This is the transcript of a video filmed in February. To watch the entire series of video interviews with Neil Woodford, please click here.
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