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Woodford moves from UK Equity Income sector

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Written by: Paloma Kubiak
22/03/2018
Star manager, Neil Woodford’s flagship fund is to be removed from the Investment Association’s UK Equity Income sector after returns failed to beat the UK stock market.

The Woodford Equity Income fund will be moved into the Investment Association’s UK All Companies sector, Woodford Investment Management (WIM) confirmed.

In order for a fund to be included in the IA UK Equity Income sector, it must deliver a higher income than the FTSE All Share index over rolling three-year periods.

However, Woodford has fallen short of this target, having achieved an average 3.5% yield (2015-2017), below the 3.6% yield achieved by the FTSE All Share in the same period.

This follows a turbulent time of late for the star fund manager, after big falls in holdings Provident Financial and Capita.

But WIM defended its position and welcomed the move to the UK All Companies sector. A statement read: “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. During the recent IA consultation on the UK equity income sector, we recommended removing the headline yield target as it does not effectively capture the impact of dividend growth over the long term.”

It added that the 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.”

‘Woodford’s long-term record shouldn’t be ignored’

Laith Khalaf, senior analyst at Hargreaves Lansdown, echoed that the fund places an emphasis on long-term returns so Woodford is willing to give up some income now in return for longer-term growth prospects.

“Consequently, over the last few years the fund has yielded on average a little less than the UK stock market, which means it’s no longer eligible for inclusion in the UK Equity Income sector.

“Fund sectors should only be seen 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. Importantly the change of sector has no bearing on how Neil Woodford runs the portfolio.

“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.”

He added that the manager “currently sees more opportunities in naturally lower-yielding companies than he has historically”, including healthcare companies working on ground-breaking therapies and treatments, as well as consumer and financial businesses using technology 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.”

A host of big-name funds including the Invesco Perpetual Income range have been kicked out of the UK Equity Income sector after missing targets. See YourMoney.com’s Fund sectors: can they help you build a portfolio? for more information.

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