Neil Woodford has become the latest high-profile victim to fall foul of the Investment Association’s UK Equity Income rules, having seen his flagship fund kicked out of the sector.
The Morningstar Silver Rated Woodford Equity Income Fund will be moved to the IA UK All Companies sector shortly, having fallen short of the Equity Income sector’s yield rules.
The news isn’t a surprise, and Morningstar analyst Peter Brunt reminds investors it’s not the first time a fund managed by Woodford has been thrown out of the sector.
Currently, equity income funds are required to produce a yield above the FTSE All-Share’s on a three-year rolling basis. The index’s yield over the past three years has been 3.6%. That compares with Woodford’s 3.5%.
However, Woodford Investment Management maintained the fund would stick to its stated income aim outlined at launch.
“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,” a spokesman said.
“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.”
Brunt says, while he would have liked to have seen the fund produce a yield in line with the market over three years, it’s important to note the fund has achieved its original objective thus far.
“Its lower yield over recent years has been due to him finding more of his best opportunities among smaller, earlier stage companies, where the dividend yield is not so high, but where there is a greater potential for dividend growth,” Brunt adds.
The statement added the firm was “comfortable” with the switch and re-iterated its focus on both income and capital growth over the long term. Woodford “has never been willing to sacrifice capital to supplement income in the short term and his portfolio isn’t dictated by yield considerations”, it continued.
The IA’s rules on yield requirements changed last year, from funds having to produce 110% of the FTSE All-Share’s yield to 100% over that three-year period. The previous rules had caught a number of investors out, including the Bronze Rated Rathbone Income’s Carl Stick and Evenlode Income’s Hugh Yarrow.
Should Investors be Worried?
Woodford’s performance has not quite stacked up to the high standards his career at Invesco Perpetual set. Despite holding a Silver rating, the fund has a one-star performance rating.
It’s the worst performer in the equity income sector, having lost 0.38% on an annualised three-year basis. Year-to-date, it’s down almost 10%, though there are worse performers in that time.
On a calendar-year basis, its first full year, 2015, saw it as one of the best performers in the sector, but last year it was dead last.
As a result of the performance, it has haemorrhaged assets recently. Having grown to over £8 billion in size in its first two years, it’s since lost £1.5 billion in the past 21 months.
Laith Khalaf, senior analyst at Hargreaves Lansdown, says fund sectors should “only be used as a rough guide to what a fund does and are no shortcut for looking under the bonnet to get an idea of how the manager goes about his business”.
He notes that, while Rathbone Income has since moved back into the UK Equity Income sector, many funds with an income mandate are now housed under the All Companies umbrella. These include Woodford’s previously managed Invesco Perpetual Income and High Income funds.
Khalaf still likes Woodford’s fund, noting over the manager’s entire career, he’s more than doubled the UK stock market’s returns. “That long-term record shouldn’t be ignored,” he adds.
Brunt says the fund is one of Morningstar’s “higher-conviction ideas” in the space and that Woodford remains one of the most-talented equity income managers around. He also took solace from a return to stability in the firm after experiencing some turnover among senior non-investment personnel.
“We also commend the firm’s approach to investor relations. Communications are some of the clearest and frequent we have seen, the fees are competitive and we find the transparency and the structure of the costs of the highest structure.”
