Woodford has become a firm favourite with advisers and unadvised clients thanks to his decades of outperformance and conviction-led style.
The manager has been proved right in a number of bold calls that were unpopular at the time.
This makes it a serious conundrum for holders of his funds – which probably includes most UK investors in some form or another.
The funds will be taken over by Mark Barnett, who is also an FE Alpha Manager and has actually outperformed Woodford over the past three years, thanks to doing better in the rising market.
Performance of funds vs sector and index over 3yrs
Source: FE Analytics
Mark Dampier, head of research at Hargreaves Lansdown, says he is personally remaining invested in the fund – but he will not be adding any new money.
"Mark Barnett has been good, but there’s only one Neil Woodford, so at least they have some good people to take over and they have a good team," he said.
"The question has always been how much is Neil and how much is everyone else – we’re going to find out."
Dampier points out that Woodford has built up investors’ confidence over many years thanks to bold contrarian calls that have been proved right.
Woodford refused to buy into the tech sector at the time of the dotcom bubble, which reportedly almost led to him getting sacked.
Performance of funds vs sector and index 1995-2003
Source: FE Analytics
Data from FE Analytics shows that investors in his funds soared ahead of his competitors and the index as a result.
The manager also shunned banks, which were widely seen as income cash-cows prior to the financial crisis of 2007 and 2008.
This led to him outperforming in those years of crisis and preserving his investors’ savings much better than his rivals.
Performance of funds vs sector and index 2007-2008
Source: FE Analytics
Earlier this year he was forced to deny reports that he was considering buying back into the sector, explaining that he still thought the business was facing strong headwinds.
Rob Gleeson, head of research at FE, says that the strong team at Invesco makes him inclined to sit and wait.
"We will keep it [on the FE Select 100] as he’s not leaving until April. When we review the shortlist in March we’ll look again based on what we know about the plans for the fund."
"He’s professional, he will want to leave the fund in a good state. In the longer term the question is, do you want to follow Woodford or look for an alternative?"
"He might have decided 'I am bored of large cap value-style and want to run a small cap growth fund' – we don’t know."
"There’s a whole group in UK equity there who have worked with him and learned from him – they have a huge UK equity team and a lot of talent there."
"Neil Woodford will be a big loss, but he hasn’t been working in a bubble."
Some commentators have suggested that a rush to pull money out of the funds could have consequences for some of the largest stocks he holds.
This would harm the returns of those still invested, meaning that anyone who acted first and pulled their money out immediately would do better.
Gleeson is not concerned and says there is no reason to panic.
"Even if half the investors pulled their money out, it is still spread among 60 of the biggest companies in the world," he said.
Gleeson says that Woodford announcing his departure well in advance means there is unlikely to be a rush of money coming out immediately, although it could happen bit by bit.
Simon Evan-Cook, senior investment manager of Premier’s range of multi-asset funds, is less relaxed, however. He fears that the news could result in mass redemptions for Woodford’s portfolios, which could adversely affect existing investors.
“Neil Woodford’s departure from Invesco Perpetual is a blow to the firm,” he said. “His track record has made him a go-to brand name for UK investors, but now he is using that brand to launch his own business.”
“In Mark Barnett, it looks like Invesco Perpetual have a capable replacement, which should provide some reassurance for existing holders. However, there have been concerns about the size of these funds, so there is a real chance that many investors use this as a chance to jump ship.”
Evan-Cook expects many loyal investors to follow Woodford, regardless of where he eventually ends up.
“In respect of Woodford himself, his brand is a powerful draw, and we would expect investors to be queuing down the street to gain access to his new offering, whatever that may be,” he said.
“I’m sure more details will emerge in the coming weeks and months, but I would not be surprised to see him run a similar product, but to limit its size. This would preserve its ability to outperform, with a likely trade-off for this being higher fees.”
“The funds market is polarising away from poor value-for-money benchmark huggers, into either cheap trackers or more expensive, high-quality active managers. Neil Woodford would certainly be at home in the latter category,” he added. Despite Barnett’s excellent track record, there are a few reasons why investors may be wary of sticking with the funds.
Woodford is also head of UK equities at Invesco, so his stamp will be on the stocks bought for the company’s other UK funds too.
Given that his career has been built on making huge calls against received opinion, investors would be forgiven for wondering if Barnett will be able to do the same – he is also taking over Woodford’s role in that respect.
Darius McDermott, managing director of Chelsea Financial Services, said: "Mark Barnett we have met a few times, he’s a good fund manager, but the UK team worked for Neil, following Neil’s lead."
"There were many similarities between Neil and Mark’s funds, although they weren’t identical."
Barnett has also been able to run a greater part of his portfolio in the mid cap sector, which has been a factor in his relative success.
With a £285m fund he has been able to do this, but funds of £14bn and £10.5bn will not be able to take meaningful positions in mid caps.
Running a fund of that size is something that few managers have had to do. Looking at Barnett’s holdings, there is a high degree of correlation between his top-10 and those of Woodford’s funds, raising the question of how much influence Woodford has over the stock-picks.
FE Research analyst Charles Younes says that Woodford may have been inclined to move on thanks to the situation in the equity income sector.
Liquidity is becoming an issue, he says, after a period in which UK equity income stocks have been in high demand.
The universe of stocks isn’t very large, and Woodford may have simply wanted a greater challenge, Younes says. The size of his portfolios means that he is even more limited in what he can buy.
If Younes is right, the issue may not be whether investors switch to another UK equity income fund but whether they look for alternative sources for income in global funds, fixed interest or elsewhere.
The consensus among experts seems to be to sit and wait if you are already invested but if you are looking to invest some new cash, look elsewhere.
"I don’t think there’s anything to do at the moment," Dampier said. "He will be working even harder for the fund, as he won’t want to leave it in poor shape. I wouldn’t want to add any money to it, though."
In an article tomorrow morning, FE Trustnet will look in detail at the best alternatives to Woodford’s funds out there.
