Our latest view on Woodford Equity Income
This article was published on 22 March 2018 and no longer reflects our current views. Read our latest view for up-to-date information.
Woodford Investment Management has confirmed the LF Woodford Equity Income Fund will soon move to the IA UK All Companies sector from the IA UK Equity Income sector. To be eligible for inclusion in the equity income sector a fund must deliver a higher income than the FTSE All Share index over rolling three year periods. LF Woodford Equity Income has not done this, as shown in the table below..
|Date||LF Woodford Equity Income (% yield)||FTSE All-Share % yield)||% of FTSE All Share yield delivered by LF Woodford Equity Income|
Yields are variable and not a reliable indicator of future income
Source: The Investment Association & Woodford Investment Management
It’s not the first time Neil Woodford’s funds will have changed sector because they failed to deliver a high enough income, and LF Woodford Equity Income is far from the only fund to be moved out of the sector. The Investment Association regularly looks at the yields delivered by each fund and removes or readmits them accordingly. It doesn’t mean there has been a change to the way the fund is managed. The main purpose of the sector classifications is to help investors differentiate funds and compare those with similar objectives.
Why has the yield been low?
Rather than focus on a strict income target Neil Woodford seeks to produce a good total return, combining a rising income and capital growth. This means he will sacrifice some income upfront for the prospect of better growth in the capital and income over the long term.
Neil currently sees more opportunities in naturally lower-yielding companies than he has historically. This includes investments in innovative (but higher risk) smaller and mid-sized businesses that lead, or have the potential to lead, their market. They include healthcare companies working on ground-breaking therapies and treatments, as well as consumer and financial businesses using technology to pioneer new services.
Almost 40% of the fund is invested in small and mid-sized lower-yielding companies, according to our analysis, with almost an additional 10% invested in companies not yet listed on the stock market (unquoted, or private, companies), and a small amount in larger low-yielding companies. This means just under half the fund is currently invested in companies we class as having a high yield, across small, medium-sized and larger businesses.
Is this still a good income fund?
Neil continues his career-long focus on identifying good businesses that he can invest in at low prices, when their prospects are not being appreciated by others.
We think the fund can work well alongside other equity income funds as part of a diversified income portfolio, or be considered by those who seek to maximise total returns over the long run.
It is less suited to those who prioritise a high income now. These investors should at least consider blending this fund with other equity income funds that aim to deliver an above market yield, or concentrate on funds that prioritise a high income.
We backed this fund to benefit from Neil’s expertise in identifying attractively-valued companies and we accept this won’t always result in a high yield. That said, we would have preferred him to deliver a market-beating income and there has been little growth in the income to date.
What is our view?
We maintain our support for Neil based on the strength of his track record and believe he has the ability to deliver excellent long-term returns. We don’t see the change of sector as a concern.
We think his approach – to invest in undervalued companies for the long term – is temporarily out of favour and his long-term record should not be ignored. He’s delivered a return of almost 27 times an original investment over his career, compared with around 12 times for the UK stock market. There are no guarantees this will be repeated and it should not be viewed as a guide to the future.
Neil Woodford - career track record
Past performance is not a guide to the future. Source: QlikView / HL to 28/02/2018
|Annual percentage growth|
| Feb 2013 -
| Feb 2014 -
| Feb 2015 -
| Feb 2016 -
| Feb 2017 -
|LF Woodford Equity Income||N/A*||N/A*||3.5%||10.5%||-8.9%|
|IA UK Equity Income||18.6%||6.0%||-3.6%||15.5%||4.2%|
Past performance is not a guide to the future. Source: Lipper IM to 28/02/2018
*N/A = data not available
Neil has invested in smaller and unquoted businesses for many years. It was always his intention to include them in the LF Woodford Equity Income Fund. Not many other fund managers have the experience or resources to do this and it gives the fund an edge that will potentially boost performance. We often say to achieve great results you must invest differently to the mainstream, but that it will lead to tough periods of performance and deviations from peers and the wider stock market at times.
We are comfortable with the inclusion of unquoted companies, but we don’t want to see them increase as a proportion of the fund from here.
The fund remains on the Wealth 150+, but as ever investors should ensure they are comfortable with the investment approach and risks.
This fund takes its charges from capital which can increase the yield but reduce the potential for capital growth.