Woodford Changes, FT Political Comment, and Digital Services Tax

Apparently Neil Woodford is losing some of his senior staff. Perhaps he needs to cut costs as the funds being managed by his firm have shrunk as investors have walked and holdings in the funds have shrunk in value. But the Equity Income Fund is still closed to redemptions with no certain date when it will reopen, and there is no sign of the vigorous action I suggested. I put forward these alternatives on June 5th, but Neil Woodford is clearly not rushing into action:

1) That Neil Woodford appoint someone else to manage the fund – either an external fund management firm or a new fund management team and leader. Neil Woodford needs to withdraw from acting as fund manager and preferably remove his name from the fund; 2) Alternatively that a fund wind-up is announced in a planned manner; 3) Or a takeover/merger with another fund be organised – but that would not be easy as the current portfolio is not one that anyone else would want.

Once a reputation is lost, resignations should follow, with new leadership put in place. Which brings me onto the subject of the comments in the Financial Times over the last two days over the position of our ambassador to the USA and Brexit.

Yesterday I sent these comments to the FT’s political editor about his views on the position of Sir Kim Darroch which were headlined “Darroch pays price for would-be PM’s craven and shameful conduct”:

“Dear Mr Shrimsley,

I found your article in today’s FT on the US Ambassador and Boris Johnson most objectionable. Mr Johnson’s comments on Sir Kim Darroch’s position were restrained and not unreasonable. President Trump has indicated he will not work with our ambassador which surely makes his position untenable. There is no point in the UK defending or retaining him in post. He has subsequently resigned – and quite rightly.

Sir Kim clearly made some injudicious comments which unfortunately have leaked out even though foreign embassies have very secure communications facilities. Was this in a private communication by him? If so it was unwise in the extreme. But if there is to be any witch hunt it should be focussed on that issue alone.

This has nothing to do with Brexit and it should have nothing to do with your newspaper’s dislike of Trump or support for Brexit. So I suggest your article was misconceived as was the accompanying FT article printed on the same page about the relationship between the Civil Service and Government Ministers. The fact that Boris Johnson failed to defend or back Darroch while Jeremy Hunt rushed injudiciously to do so surely shows which politician is wiser.”

Today we have another article in the FT so extreme as to be comic by Martin Wolf which is headlined “Brexit means goodbye to Britain as we know it”. It suggests the UK will lose its reputation for being stable, pragmatic and respected. It describes Boris Johnson as a serial fantasist and concludes that the UK is no longer a “serious country”.

But the FT did cover well the publication of draft legislation on a new Digital Services Tax – see https://www.gov.uk/government/publications/introduction-of-the-new-digital-services-tax . This will impose a tax on companies that operate social media platforms, search engines or online marketplaces to UK users. This is aimed to collect tax on revenues in such companies that are currently avoided by the fact they frequently operate from low tax jurisdictions. The focus is clearly on companies such as Alphabet (Google) and Facebook who generate large revenues from the UK but pay relatively little tax.

However there are some UK companies that are potentially liable such as Rightmove or Just Eat but they are likely not to have to pay because a group’s worldwide revenues from these digital activities needs to be more than £500m with more than £25m of these revenues derived from UK users.

The USA is crying foul over a similar French tax and surely quite rightly. The size exclusion means only the big US firms are going to be liable, and there is the issue of double taxation – they will be taxed on both revenue in the UK and potentially profits also. I suggest the USA has a justifiable complaint. It should surely be a tax on all such companies other than very small ones, with a deduction from Corporation Tax allowed to offset the double taxation issue.

There is one thing for certain. Such measures from the UK and France may threaten retaliation by the USA and might certainly jeopardize any new trade agreement between the UK and USA post-Brexit.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Will Neil Woodford Succeed?

How long do you give a fund manager before giving up on poor performance? This is the key question faced by investors in the funds run by Neil Woodford and his Woodford Investment Management company.

Neil Woodford had a very successful record at Invesco – their High Income fund turned £10,000 into £230,000 over 25 years. In 2014 he departed to set up his own investment company and he attracted many followers to the new platform but the record since then has been very poor. For example the main LF Woodford Equity Income C Acc fund has delivered a return of -7.0 % over 3 years according to TrustNet while the stock market has in general been booming. The Woodford Patient Capital Trust which invests in smaller, early-stage companies is even worse with a share price total return of -10.7% over 3 years according to the AIC.

Woodford also run funds for Hargreaves Lansdown and St. James Place although they might have slightly different mandates. Recent articles in the FT suggest those companies still have faith in Woodford with comments about the “contrarian” approach of Mr Woodford and that it is likely to come good in the end. But will it? Has the market changed while the style of the fund manager has not? Has he simply lost his touch as a stock-picker? Over-confidence in one’s ability can be a great danger for stock-pickers. But perhaps he has just been unlucky with his stock selections?

Three years is about as long as I give fund managers before exiting completely, and I would reduce my holding in a fund before then. My decision tends to be based on my view of the investments the fund is holding. For example, the top 5 holdings in the Equity Income Fund are Barratt Developments, Imperial Brands, Burford Capital, Provident Financial and Theravance Biopharma. The last one is a one-product biopharmaceutical company with no profits, Barratt is a housebuilder when investors are fleeing the sector due to house price declines and the threat of higher interest rates, Imperial Brands is a tobacco company subject to ever tougher Government regulation, Burford Capital is a backer of law suits (a litigation funder) and Provident Financial is a consumer loans business. These are all companies that other investors might avoid so they are truly contrarian investments. The holdings of Woodford Patient Capital are even more idiosyncratic. One of the largest holdings is in Purplebricks which I have commented on negatively in the past. Investors therefore need to judge whether these kinds of investments will come good in the next year or two. I have my doubts.

Another question to be asked is whether Woodford has simply spread himself too thinly with multiple funds now under management. Does he have the same level of support from a team that he had at Invesco? Large fund managers are not one-person businesses.

One issue to look at in addition is does the fund manager have a clear investment process, i.e. do they stick to clearly stated rules or are just idiosyncratic? Is it the process that is failing or the manager’s decisions that are at fault? All fund managers make some mistakes but a look back over past investments can be a good indication of what is going wrong.

My past experience tells me that “contrarian” fund management approaches often fail. Swimming against the tide of investment trends is positively dangerous and rarely works. Incidentally I watched the Burt Lancaster film “The Swimmer” last night – a very stylish film indeed. The ending might represent the failure of dreams over reality. Perhaps Neil Woodford’s dream is fast disappearing?

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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