BIG IS NOT ALWAYS BEAUTIFUL
I often meet clients who regard themselves as cautious investors, yet they own fairly large amounts of individual shares. When I point out that this is an anomaly they often say something like “oh, but company x has been an excellent investment”.
When the banking crisis erupted, thousands of people saw massive falls in their wealth as they owned shares in one or more of the banks. Some poor souls had all of their wealth tied up in these shares as they were employed, or had been employed, by the Bank and had built up the shares over a number of years. Those that owned stockbroker managed portfolios also tended to do particularly badly, as many of the companies affected were regarded as “blue chip” by their brokers and as such they often made up a far greater proportion of their portfolio than was wise.
Now we have the BP crisis (another company regarded as “blue chip”) with thousands of barrels of oil, and shareholder value, being spewed into the Gulf of Mexico on a daily basis. This has resulted in the share price falling by over 32% in six weeks which means it is now 20% lower than it was five years ago. It also proves, once again, that the size of a company is no guarantee of its future success.
History has shown time and time again that once a company reaches a certain size, when it comes to its share price there is often only one way it can go. In the year 2000, Vodafone was the UK’s largest company by size and since then its share price has fallen by 64% compared to the FTSE 100 index which is down 17%. I wonder how many people were advised to buy Vodafone by their brokers ten years ago?
So why do portfolio and fund managers insist on owning companies just because they are big? The answer is fear. The FTSE 100 index gives a greater weighting to the performance of the larger companies within it, and as a result the 10 largest companies make up 40% of the index. This results in a lot of managers and brokers being afraid of underperforming against the index, and to avoid this they buy shares in companies simply because they are big rather than a belief in the long term prospects. This is one of the reasons we are so opposed to tracker funds. It is also one the reasons we put so much emphasis on meeting the managers of the funds we recommend to our clients.
Often, once you dig beneath the surface, you find the make-up of some funds is little different from the index. Managers try and explain this by using fancy phrases such as tracking error and minimising investor risk, but it is not good enough. Over the long term a talented manager who sticks with the courage of their convictions can achieve outstanding returns, although doing so does require a great deal of courage, and not being afraid of underperforming in the short term.
Take Neil Woodford, the manager of the Invesco Perpetual High Income Fund. For as long as I can remember he has had no Banks in his fund, even though at one stage they made up 25% of the index, and last year he got rid of BP and Shell. It has to be said he did this as he was worried about the sustainability of their dividends, and not because he foresaw one of their pipelines breaking. However, in doing so he paid no regard to the fact that, combined, they made up 16% of the index. In the short term that decision hurt the fund’s performance, but now it looks like genius.
So, what has Neil’s decision making and index tracking avoidance meant to an investor in the fund? Well in the last ten years Neil’s fund is up 137% against the All-Share Index which is down 15% (source- Lipper 3/6/10). Given that Neil manages funds totalling £15bn in size, it proves that even the largest funds can be successfully managed on a contrarian basis.
So those of you who own shares should ask yourselves, if the shares you own did an RBS or Marconi, could you live with this? Remember, size isn’t everything!
Steven Forbes
Managing Director
MAY 2010 FACTS
MARKETS AND MANAGERS WE MET LAST MONTH
FTSE All Share
1 year return +16.3%
5 year return +6.1%
S&P 500
1 year return +15.6%
5 year return -9.1%
FTSE Eurofirst 300
1 year return +12.8%
5 year return -11.6%
M&G Global Basics (Graham French)
1 year return +39.0%
5 year return +90.3%
Jupiter UK Growth (Ian McVeigh)
1 year return +26.8%
5 year return +41.7%
Templeton Global Bond (Michael Hasenstab)
1 year return +19.2%
Since Launch Nov 2005 +70.4%
Westbury Commercial Property Fund (John Styles)
New Launch
(Source - ft.com 1 June 2010)
Best Bank Accounts
West Bromwich Building Society paying 2.60% gross available only over the telephone and postal system with instant access.
Halifax Web Saver Extra Account paying 2.6% gross available only over the internet.
(Source –Moneyfacts June 2010)
