Neil Woodford has apologised for poor performance across his two funds following the share price falls in two core holdings, Provident Financial and AstraZeneca, over the summer. 
The FE Alpha Manager opened up again over what the problems at lender Provident Financial – a core holding across both the five FE Crown-rated CF Woodford Equity Income and recently-launched CF Woodford Income Focus funds – had meant for him and the investment process.
He said July and August had been “particularly difficult” and there had been a temptation to focus on the company-specific issues.
“I'm very disappointed with the short-term performance and indeed, have been criticised for it,” he said.
“And I think I'm right to be criticised. It's been a difficult period. And I'm very sorry for the poor performance that we've delivered really now since 2016.”
Performance of funds July/August 2017
Source: FE Analytics
The Equity Income fund fell by 6.36 per cent between 1 July and 31 August while Income Focus fell by 1.6 per cent, compared with a 2.57 per cent gain for the FTSE All Share index.
However, the manager said it was important to maintain investment discipline even through difficult periods.
“What's the right valuation for the businesses that I'm investing in and indeed, the ones I'm not investing in? Where is the market making an error? Where has the market got the wrong end of the stick? Has it distorted reality? And it often does.
“It did it before. It's done it on numerous occasions in my career. And it is certainly doing it now in my view. That is a painful place to be.”
He said there was a temptation to soften the investment discipline and follow others in buying more miners, selling cyclicals and hide where everybody else is investing.
“And then all the attention, and all the fuss, and all the criticism would go away. But as I've said, that would be a betrayal of my investment principles,” he added.
“I believe this is entirely the wrong thing to do in terms of the… medium and long-term interests of our investors.”
Woodford said that if you take a broader look at the portfolio and stock market, it suggests his underperformance is more a product of “the rather odd characteristics of this bull run”.
He said the rally was a result of a “very narrowly led market” where eight stocks have accounted for more than half of the growth in the FTSE All Share index.
Source: Woodford Investment Management
The manager added that the market seems to want to bid up the prices of stocks reliant on unsustainable sources of growth.
“The consensus view is playing out by bidding up stocks that give exposure to this sort of Asian and China credit growth story and exiting out of anything really that doesn't deliver that,” Woodford noted.
“And of course, parts of the market that don't deliver are the bits of the market where I'm seeing a lot of value… so domestic economic cyclicals, health care, and indeed, small early stage portfolios.”
The fall of Provident Financial in August, which had a significant impact on the funds, was the catalyst for much of the recent criticism over the manager’s stockpicking ability.
“Clearly, owning as much as I did in Provident Financial has been harmful for the funds, because the stock has fallen a hell of a long way, in my view a disproportionate amount,” the manager explained.
“The share price should have fallen to reflect the profit warnings that we've seen. But I think the stock market, yet, again, has become hysterical and, yet again, has multiplied many times the impact of all of this problem in the home credit business.”
He added: “For 30 years now, I have been running money in a very active way. I have never been a closet index manager.
“I've always taken strong views about where value is in the stock market. And I have for all of that period been taking big stakes in small companies and big stakes in big companies. And I'm very happy to do that.
“I don't believe that there is a problem with owning a large stake in a business that is profoundly undervalued.
“My career has been built on taking big bets in businesses that have been profoundly undervalued. I think it is entirely appropriate and entirely consistent with what we say we do with respect to our managers.”
He further explained: “Clearly, lots of active managers who have closet index portfolios will be quite happy to have very small stakes in businesses. But that isn't how I run money.
“That has never been how I have run money. And it will always be a characteristic of what I do going forward. And I'm very happy about it.”
Still, a second profit warning by the firm in three months, the departure of the chief executive and the scrapping of the dividend were unanticipated by Woodford, particularly given the level of engagement with management.
While many people accused him of being naïve, having been lied to, or not having listened, he said there was a “bigger point” to be made.
“As a public market investor, you have to accept that there will always be some fog between you and what's going on in a public quoted business,” he explained.
“The regulations that surround what I do ensure that there is a distance. There isn't a complete and an open flow of information from a public listed equity to an investor.
“It is always the case that you can't and don't know all the things that you want to know about what's going on in a public quoted business. And that's the frustration.
“It actually may be a surprise to our investors. But it is the fact of life that the regulatory environment that sits around public markets ensures that I can't know all the things that I would want to know, certainly, for example, in a case like Provident Financial at a really important time like this.”
Despite the summer setback, Woodford said he remains confident on a three- to five-year view about how the portfolio is positioned.
“It hasn't played out in terms of investment performance. But when I look at the portfolio and think about the businesses that we're investing in and think about how well they performed as businesses, I remain very confident about that underlying valuation opportunity playing out in share prices in the relatively near-term,” he said.
“My job is to focus on what's really happening in the real world, not to get distracted by themes that play out in the stock market. They can often be like mist on an October morning. You know, it'll just evaporate very quickly.”
The manager said the fund was exposed to the right sorts of business that are performing well and whose share prices do not currently reflect underlying good performance, but will.
“There's huge potential in the portfolio, huge undervaluation,” he noted. “And it's a great portfolio, one that I own and want to own more of.
“The short-term performance is painful and is difficult, but it isn't a permanent loss of capital. And I can and I believe I will rebuild the performance and rebuild that capital that we've lost recently.”