“Audiatur et altera pars”
“Let both sides be fairly heard”
(Principle of Natural Justice)
“Follow the course opposite to custom and you will almost always do well”
“The seeker after truth does not put his faith in any consensus,
however venerable or widespread.
Instead he questions what he has learned of it,
applying it to his hard-won scientific knowledge, and
he investigates, and checks, checks and checks again.
The road to the truth is long and hard”
Hasan Ibn al-Haytham, Mathematician, born 965 AD
“Have you noticed that consensus includes the word con?”
Last month I wrote about process and why it’s key when selecting fund managers we want to stick with over the long haul for our clients. I mentioned Anthony Bolton, the long term manager from launch in 1979 of the Fidelity UK flagship fund, and also explained what attracted us to the thought processes of Terry Smith. And having dropped Joel Greenblatt’s name into the mix let me now expand on his achievements and process.
Joel managed a Hedge fund in the US which over ten years in the 1990s compounded returns at an average annual rate of 34%. For those of you would like a better estimate of how outstanding that is than a “Jings, Crivens and Help Ma Boab” reaction, applying the Rule of 72, (by dividing 72 by 34), we find that on average he was doubling his client’s money every 2.12 years. Fact. I did say “on average” because there were some years the fund fell in value, and other years where the positive returns were very significant. Fact.
So if an investor started with $10,000 and stayed put, through good and bad years, after ten years they pocketed the best part of $300,000. And pocketed it they did, for Joel, feeling his process was unlikely to cope with the then changing stockmarket conditions, wound up the fund and distributed the proceeds. Fact.
Do read his “Little Blue Book That Beats the Market” published in 2005, in which he explains that he wrote about investing in a way that could be understood by his 11 year old son, and in which he gave away his “secret process.” When asked if he was worried about giving away secrets he replied that he wasn’t, because few would stick to the formula when “it wasn’t working.” And he explained that any value process can go for up to three years, or even longer, out of favour. Fact.
In an interview with him I watched last week, he said that when you seek somebody to manage your investments you should only choose those who have a process that a) makes sense and b) that you’ll stick with through tough times when their style falls out of favour. Joel’s process was to buy US stocks showing the biggest discount to their fundamental values and simultaneously shorting US overvalued stocks. Fact.
He gave the example of the top US mutual fund which from 2000 to 2010, in an awful decade where US indices were flat, returned 18% pa, doubling long term client returns every 4 years. However the average investor in the fund lost 11% pa by reacting emotionally to both “bad news” and “good news”- selling low and buying high in other words. Fact. So after a couple of years of good performance they’d pile in, then after poor or underperformance headlined by the media, they’d pile out. Ouch.
As to returns from US Institutional investors over the same ten years Joel reported that almost half the funds in the top quartile (top 25%) had spent at least 3 years during the decade in the bottom decile (10%). Fact. As he admitted during the interview, it’s difficult keeping clients in a fund during such periods of underperformance given the adverse publicity that accompanies it. And hard to keep your job.
Now let’s consider the role of the media in all of this. If you too kept a copy of “Media, Mania and The Markets,” published in 1994, subtitled “A profound exposé of the great ERM disaster, the Lloyds debacle and why you should never trust the media or the crowd,” you may recall the section entitled “Investors And The Distorting Mirror” which contains the following advice….
“When it comes to investment matters, succumbing to media influence can be pure poison” and goes on “the media follow and exaggerate trends. If your main concern is to develop a story you must have a story to develop in the first place.” Then follows a list of media hyped errors from 1980 to 1994 when the book was published. It’s well worth a read.
And that brings me on to Neil Woodford, who unfortunately these days keeps Trump and our Brexit shambles off the headlines. Some of you will already know we met with him again on Thursday to hear his side of the story, a side that hasn’t been allowed to be aired. (I draw your attention again to the quotes above).
I was interrupted at breakfast last Sunday morning by a worried lady who has been a client for 18 years. She’d read the weekend ‘papers and couldn’t understand why I wasn’t quoted. She was amazed to hear I had been interviewed, but because my views didn’t fit with their angle I wasn’t quoted. Think back to the recent anti-Woodford hysteria, and you won’t see a word in his favour. The media are judge, jury, and prosecution wrapped into one. No witnesses were called in his defence. Fact. Now doesn’t that seem odd to you?
If you challenge their fiction dressed up as facts, not only do you not get quoted but you’re treated like a pariah on social media. Let me give you some facts. In 1998, as the dotcom boom was heading into bubble territory, Woodford’s value process for his High Income fund remained unchanged since he launched it in 1988. Tech stocks were all the rage and impossible to value. So he refused to join in the party and his performance suffered. The media wrote that he’d lost it. Investors rushed to sell value funds to join the herd “benefitting” from the Dotcom boom. And of course the bubble burst. Fact.
He wasn’t alone mind you. The best value investor for decades, Warren Buffett, was also accused of losing it in 1998. From then until 2000 his “investment baby” lost 44% as the main US Index fuelled by dotcom stocks rose 32%. Fact. But overvalued bubbles always burst. Fact. Do you remember the stocks that fell 95%?
Same happened again to Woodford in the mid-2000s when he refused to own Bank shares that dominated the FTSE 100. Again the media attacked him. Massive redemptions went off in the direction of funds that “got it.” The rest is history. As momentum funds and Index trackers took a caning in the Great Financial Crisis, value funds like Neil’s performed admirably. Fact.
Now it’s understandable you may be persuaded by allegations that Neil has broken rules, that he’s changed his style and his process, that he’s not the star they claimed he was, and that he doesn’t care about his investors, etc. Such accusations are the work of fiction and they’re vindictive. It reminds me of what US economist to President Kennedy, JK Galbraith, said about the media- “Always remember that the experts quoted in the media are the experts the media select to be quoted.”
And for those who accuse us of not seeing this coming I’d remind you that despite media claims that he’s changed his style and process so successful over the long haul since 1988, he hasn’t. Let me put his total performance for his followers since 1988 to Thursday into perspective... If £5,000 had been invested on day one in his Invesco Perpetual High Income in a PEP, kept there through all the times he was supposed to have lost it, then switched to his Woodford Equity Inc fund at launch, it would now be worth £145,000. Fact.
Had you however invested for the same period in a “cheap” UK Index tracker your fund would now be £74,000. That’s £71,000 less. Fact. Yes, of course I’m aware that past performance is no guide to the future, but we continue to give Neil’s process the benefit of the doubt. As independent advisors we can choose from any sector and fund. And we do. In our opinion the UK Equity Income sector remains great value for money as can be gauged by the fact that shares sold by Neil to meet redemptions are being snapped up by others.
Oh, something else that I haven’t seen quoted is this… despite the Equity Income fund being “closed” currently to protect the interests of long term investors dividends will continue to be paid to those requiring income, and reinvested for those wishing them to be accumulated. Fact. Finally, because we believe an unregulated media are making unfounded allegations using exaggerated numbers and are seen by panicking investors to be “giving advice”, I have written to Andrew Bailey of the Financial Regulators to complain on behalf of all investors. I’ll let you know his response if I receive one.