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By Cynical Bear | Sunday 9 September 2018
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
It is hard not to compare these two behemoths of the UK fund management industry. Neil Woodford has (still) a great long-term track record but the recent respective performances of their flagship funds are chalk and cheese and now Terry Smith is looking to encroach on Woodford’s territory further with a small company investment trust too.
Woodford’s Equity Income Fund and Terry Smith’s Fundsmith Equity Fund have both recently issued their six monthly reports and although I understand that Fundsmith Equity has a global rather than a UK focus, the other differences are stark.
Let’s start with size - although Woodford reached well over £10 billion of assets at its peak, the recent performance of the last couple of years, combined with redemptions, leaves it at around the £6 billion mark. In contrast, Terry Smith’s fund, helped by returns of over 300% since launch in 2010, now sits at £17 billion.
Performance – Fundsmith Equity has an annualised return of 20% and is leading the way pretty much, whereas Woodford has achieved just over 20% in total since its launch in 2014 and is very much towards the bottom of the pack.
That shouldn’t be too much of a surprise though as Terry Smith has focused on the global growth type stocks whereas Woodford is sticking to his thesis that value stocks and the UK focus will come through eventually when the mighty crash happens everywhere else – we shall see.
The most significant difference, in my view, is in the make-up of the funds. Fundsmith Equity’s latest factsheet states that it only has 27 holdings and the average market cap of each holding is over £100 billion. I find both statistics a tad surprising but holding just a few massive eggs and looking after that basket has paid dividends so far.
The contrast in the Equity Income Fund is quite astonishing and I suggest one reads the ACD report on Link Asset Services website for the full picture. First, the portfolio has over 100 positions, although some are different types of share in the same stock, but still a huge number. However, there is a huge tail of tiny positions so this doesn’t worry me excessively but it is the make-up of the portfolio that is so different.
The ACD’s report helpfully notes the stocks in the Equity Income Fund that are either unlisted or on AIM and, adding it all up, I calculate that as at 30 June 2018, unlisted stocks total 13.5% and the AIM stocks comprise a further 22%.
I’ve mentioned a few times about the 10% limit for unlisted stocks although apparently one can go over the 10% if there are IPOs in the pipeline or there is a plan to reduce below that 10% within six months. We shall see but I’m not sure which IPOs are imminent and any further redemptions will make the situation worse.
The main point though is that a huge amount of this flagship equity fund is invested in illiquid or small cap stocks and there are plenty of other small-ish company stocks outside of the 35% mentioned above too. This was brought home to me when I read a quote from Terry Smith this week about the launch of the Smithson Investment Trust which is looking to raise £250 million to invest in smaller companies globally.
He said that the new fund would consider investing in stocks like US fast-food chain Wingstop, Fever-tree and US airline business, Sabre Corporation. He went on to say:
“We couldn’t get any of these into the main fund as they are too small. We would buy so much of it, it would be illiquid.”
Let’s bear in mind that the stocks he referenced are currently valued in the billions, the smallest of which is Wingstop at about $2 billion. The other two are around $6-7 billion and would easily be in the top half size-wise of the stocks currently in Woodford’s flagship fund.
I wonder whether Terry Smith is partly using this launch as an excuse to troll Woodford a bit and highlight the fact that Woodford’s Equity Income Fund is full of small companies and illiquid positions that he wouldn’t be seen dead investing any of his funds in. It re-emphasises the significant risk that I have mentioned a few times that Woodford is unable to get out of many of his positions quickly which is why when redemptions rack up, it is forced to sell the likes of Astrazeneca and Lloyds Bank which then exacerbates the issue.
Time will tell who will win this battle of the behemoths but Woodford has some way to go to catch up and I imagine that the Smithson Investment Trust will suck up a bit more retail liquidity from Woodford’s declining empire too in the short-term.
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