'Repeat what works': a simple mantra all investors should follow

A few years back, at one of the annual Omaha gatherings of the Berkshire Hathaway (US:BRK.B) faithful, a shareholder lobbed a curveball at the two giants of investing on stage, Warren Buffett and Charlie Munger. “Scientists and philosophers look for a unifying theory when possible,” began the interrogation. “What is yours? Is it Buddhism, or Paganism, or something else?”

“It’s pragmatism,” replied Munger, without skipping a beat. “Partly we do things in our different way because it suits our temperament and natures, and partly we do it because we found through experience that it works better… we’re demonstrating the fundamental algorithm of life: repeat what works.”

Neil Woodford, the fund manager who was once described as the UK’s answer to Buffett, is now best remembered for defying this wisdom. After a 25-year career at Invesco – in which he eschewed the hype and subsequent crash in technology and bank stocks in favour of steady dividend chuggers – he went solo and dived into speculative growth companies and unquoted start-ups.

The story of his downfall is well-documented, but complicated. Hubris, stubbornness and opacity played starring roles, but timing, the financial media, over-promotional brokerages, and a desire to be at the bleeding edge of corporate finance and innovative early-stage businesses also contributed to a debacle that would end in the dissolution of Woodford Investment Management (WIM) in 2019.

Nor was Woodford’s post-Invesco career trajectory at odds with the broader fund management industry. Few investment trusts, pension funds or portfolio managers have blown up so spectacularly as Woodford in recent years, but over the past decade, plenty have increased allocations to illiquid assets in a bid to get exposure to the outsized reported returns of private markets. A 2022 study estimated the average $1bn university endowment fund had allocated 16.6 per cent of capital to buyout groups and 13.4 per cent to venture capital. Such investors tend not to fret about monthly price moves and annual dividends.

One of Woodford’s big failures was to misread the needs, patience and risk tolerance of those who followed him to WIM. Had he instead stuck to the formula that won him so many fans at Invesco, his reputation as the stockpicker of his generation may well have been cemented.

At the end of 2012, the Invesco High Income open-ended fund for which Woodford was best known managed £11.9bn of client money, yielded 4 per cent and counted 113 separate holdings. The 10 largest of these (see table below) made up 58 per cent of the fund and were concentrated on a handful of company attributes: big dividend payers with sticky revenues, good pricing power and steady growth.

It can be hard to look past how things ended, and remember the investing nous of Woodford’s original contrarian, long-term investing style. But with the (enormous) benefit of hindsight, we can categorically say that he was onto a good thing with these holdings, even if one – outsourcer Capita (CPI) – lost 93 per cent of its value.

Had he stayed at Invesco and left the 10 stocks untouched – or better still, concentrated the whole portfolio in them – they would have since returned 183 per cent, equal to an average return of 11 per cent a year. That was in line with Woodford’s returns in the two decades to 2013 and would have enshrined him in the elite tier of UK equity income fund managers. Sticking with those 10 stocks throughout last year, when 15 per cent of the decade’s returns were made, would have made Woodford 2022’s standout UK fund performer.

Of course, after a while, investors would have probably asked why they were paying him to do nothing. To which he could have replied very simply, “repeating what works”. It’s harder than it sounds.