Star investor Neil Woodford sees equity income fund fall short on yield
The star investor’s fund will be booted from the Investment Association’s UK Equity Income sector.
Neil Woodford’s investment vehicle has defended its strategy despite its equity income fund getting the boot from a key sector list after falling short on a benchmark measure for returns.
The £7.7 billion LF Neil Woodford Equity Income Fund failed to deliver a higher income than the FTSE All Share Index over a rolling three-year period, having come in just shy of the 3.6% yield threshold at 3.5% .
It means the star investor’s fund will now be knocked out of the IA’s UK Equity Income sector into the IA’s UK All Companies list.
He believes this strategy is in the best interests of his investors and he has never been willing to sacrifice capital to supplement income in the short term and his portfolio construction isn’t dictated by yield considerations Woodford Investment Management statement
But Woodford Investment Management played down the effective demotion, saying the fund’s focus was not on yield but on delivering a certain level of pence per pound.
“Throughout his 30-year investment career, Neil has focused on delivering positive long-term total returns through a combination of income and capital growth for his flagship equity income funds.
“He believes this strategy is in the best interests of his investors and he has never been willing to sacrifice capital to supplement income in the short term and his portfolio construction isn’t dictated by yield considerations,” the firm said.
It added that, during a consultation with the IA, it had recommended removing the headline yield target which it claims does not “effectively capture the impact over dividend growth over the long term”.
“Neil’s focus for the LF Woodford Equity Income Fund (and his previous equity income funds) has been, and always will be, on delivering a particular level of income per share, rather than a specific yield.
“From the outset, Neil said he would aim to deliver 4p based on the launch price of £1 and grow that income each year.
“That commitment remains.”
The top 10 holdings of Mr Woodford’s equity income fund include the likes of tobacco giant Imperial Brands, pharma company AstraZeneca, financial firms like Lloyds and Legal & General, as well as house-builders Barratt Developments and Taylor Wimpey.
UK stocks make up more than 90% of its holdings, while, on a sector basis, financials and healthcare top the list at 37% and 25% respectively
Laith Khalaf, a senior analyst at Hargreaves Lansdown, said the reason behind the fund’s lower yield was that Mr Woodford “sees more opportunities in naturally lower-yielding companies than he has historically” and is focused on long-term returns.
“This includes investments in innovative, but higher risk, smaller and mid-sized businesses that lead, or have the potential to lead, their market,” he said, pointing to healthcare firms working on “groundbreaking” treatments and consumer and financial firms using tech to pioneer new services.
“These are companies that the manager has identified as potential drivers of long-term growth, but in the meantime their lower yield has an impact on the overall income produced by the portfolio as a whole.”
Mr Khalaf noted that a number of income funds have been placed in the IA’s UK All Companies sector, including two of Invesco Perpetual’s income funds which were previously managed by Mr Woodford.
“Though he has had a difficult period of late, Neil Woodford has turned £1 into almost £27 over his entire career, compared with the £12 from the UK stock market, and that long-term record shouldn’t be ignored,” Mr Khalaf added.