Despite concerns over the performance of its UK equities mandate with Woodford Investment Management, the Kent County Council Superannuation Fund has elected to retain its mandate with the embattled asset manager.
UK equities have struggled in recent months. The FTSE All Share lost 6.9 per cent over Q1 2018, according to data from Schroders.
The £6bn Kent fund currently holds three UK equity mandates, spread across Schroders, State Street Global Advisors and Woodford’s Equity Income fund.
Over the course of 2017, Schroders delivered 12.88 per cent returns, against a customised benchmark of 12.83 per cent.
Kent County Council is facing a classic stick-or-twist dilemma with Neil Woodford
Robin Powell, The Evidence-Based Investor
The performance of SSGA and Woodford is measured against the FTSE All Share index, which grew by 13.1 per cent over 2017. State Street beat the benchmark with returns of 13.29 per cent.
In what has been a challenging period for Woodford, the asset manager delivered returns of just 0.91 per cent in 2017.
In November, the scheme’s committee noted that its main area for concern was “continued underperformance” from the asset manager.
Neil Woodford has suffered several high-profile blows to his fund. Capita’s share price crash and profit warnings from lender Provident Financial have had an adverse effect on the manager’s performance.
Woodford survives, for now
Neil Woodford began managing money for the scheme in 2007 at Invesco Perpetual. In 2014, when he set up his own asset management business, Woodford Investment Management, Kent moved its mandate with the manager. Its investment approach is unconstrained.
Last year, the committee observed “some high profile investments which have gone badly wrong, Provident being notable”.
In August, the Financial Times reported the resignation of Provident’s chief executive Peter Crook, following the company’s second profit warning in two months.
At a March committee meeting, the fund resolved that “the Woodford UK equity mandate be retained, but that this decision be reviewed at the November meeting of the committee when Mr Woodford would be requested to attend”.
The Kent fund is Woodford’s only LGPS client. A spokesperson for the council said: “We will keep the mandate under review.”
Can Woodford recover?
Assets under management in the Woodford Equity Income fund dropped from £10.2bn less than a year ago to £7.2bn in March.
Last year, the committee observed that the manager’s unconstrained style can lead to “significant under and overperformance”.
Robin Powell, a consumer campaigner and editor of The Evidence-Based Investor, criticised active fund management for delivering poor value and accused trustees of being “far too happy to hide behind the advice of investment consultants, who almost invariably favour an active approach”.
Powell was pessimistic on the manager’s ability to turn its performance around and advocated a passive investment approach.
“Kent County Council is facing a classic stick-or-twist dilemma with Neil Woodford. He has trailed the market after costs by a huge margin over the last three years,” he said.
“It will take stellar outperformance from Woodford in future years for the council just to recoup the money it’s lost so far relative to using an index fund,” he added.
Andy Barber, senior manager researcher at consultancy Mercer, urged schemes not to review their asset managers “in isolation”, but as a roster.
“If you couldn’t really explain the underperformance by style, then you might start asking questions,” he said, which could include queries over capacity constraints, changes in personnel and whether “the manager is failing to apply [its] processes”.
Barber observed that schemes will need to show more patience with managers who take an unconstrained investment approach: “Relative performance is going to be more volatile, and you are going to have to be prepared to have a longer-term time horizon on judging the manager.”
“You're probably not going to have anyone much longer than seven years,” he added.
UK equities have struggled
Regardless of Woodford is succeeding in applying its processes or not, the UK equity market has proven difficult to negotiate for a number of fund managers.
Douglas Scott, co-manager of the UK equity income fund at Kames Capital, argued that Brexit has left the UK equities “out of favour” with investors, but is bullish on their prospects.
The UK economy is “a bit more robust than it’s given credit for”, he said. “Some of the issues... are perhaps more structural, particularly the shift from the high street to online.”
Cumbria implements equity protection strategy
The Cumbria County Council Pension Fund has joined the ranks of local authorities hedging their equity downside with an equity protection strategy. Nearly £1.1bn of the fund’s equities will be covered by the arrangement.
A Woodford spokesperson said: “Throughout his career, there have been times when Neil’s funds have underperformed the broader market because of a contrarian view – and this is one of those times.”
“He believes there are inherent risks in inflated asset prices, and his strategy and stock selection will remain focused on exploiting the most attractive valuation opportunities,” the spokesperson added.
