Could things go from bad to worse for Neil Woodford?
This year has been one to forget for Neil Woodford. His investment decision-making ability has been questioned by a wide range of investors after a poor performance by his standards. His funds have generally underperformed their benchmarks, and this has led to his reputation suffering at least some damage.
Looking ahead, his fund performance may deliver strong returns in the long run. However, in the short run things could realistically go from bad to worse.
One of the major decisions made by Neil Woodford this year has been to sell stakes in long-held companies such as GlaxoSmithKline and British American Tobacco. At the same time, he has purchased a large stake in Lloyds which makes it the fifth biggest holding in his UK Equity Income fund.
While in the long run Lloyds could perform well and deliver high returns, the reality is that the UK economy faces a highly challenging period. Brexit has caused confidence to fall, which has helped to move inflation higher. With consumer spending likely to come under pressure due to falling real disposable incomes, the economic outlook for the UK seems tough. This could hurt the performance of banking stocks such as Lloyds. With the bank operating almost exclusively in the UK, its share price could come under pressure.
Although Lloyds makes up just 3.1% of Neil Woodford's UK Equity Income fund, his decision to make it one of his top holdings could be scrutinised by investors. Should the bank's share price fall in the short run, it may be viewed as another 'error' by the star fund manager.
Likewise, if Brexit negotiations continue to move along at a slow pace and the pound continues to weaken as the prospect of a 'no deal' builds, international stocks such as GlaxoSmithKline and British American Tobacco may see their share prices rise in the short run. Having sold them recently, this could be seen as a further mistake by Woodford.
Of course, he has been in a similar position before. During the dotcom bubble he was viewed as being out of touch with a new growth avenue. He sat out the bubble and endured criticism for doing so - until it burst and suddenly he was back in fashion once more. Therefore, a similar journey may be ahead this time around.
Certainly, his short-term performance has been disappointing. But the reality is that no investment style, strategy or fund manager can constantly stay ahead of their benchmark. Sometimes one strategy is successful for a period, then events happen and change the market. This can mean what was successful last year is no longer a worthwhile strategy - as was the case regarding the dotcom bubble and subsequent crash.
While things may get worse before they get better for Neil Woodford, in the long run he could be proved right in his decisions. With his reputation being somewhat less impressive than it once was, now could be the perfect time to buy his funds for the long term.
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Peter Stephens owns shares in GlaxoSmithKline, British American Tobacco and Lloyds. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.