Woodford season begins this month, when the Citywire A-rated manager’s new venture is expected to open its ‘offer period’ for its new equity income fund.
The notion of the offer period is a strange one for an open-ended fund: it is more commonly heard in the closed-ended world, where subscriptions for investment are invited for a set period or until a maximum asset threshold is reached.
‘I have not really seen it before,’ commented Christopher Sexton, investment director at Saunderson House. Justin Oliver, investment director at Canaccord Genuity Wealth Management, has not come across such a mechanism either. But he is enthused that it may imply Woodford has capacity on the mind. ‘Our experience is that the best managers set a limit for their assets at a very early stage.’
Of course, that is more commonly done with small-caps than FTSE 100 dividend payers, but Oliver remarks that it is nevertheless still cumbersome to buy huge large-cap stakes – especially when the market knows you’re coming. ‘We know that dealing even in the largest companies can require finessing.’
However, Sexton does not expect that to presage a hard or soft closure of the fund. ‘I do not think they will limit it. He clearly did not have trouble managing huge sums of money at Invesco Perpetual.’
Peter Sleep, senior investment manager at Seven Investment Management, concurs. ‘The nature of the fund is that it is capable of taking large amounts of money. I can’t imagine why they would want to limit themselves.’
Sexton believes that the offer period means Woodford would prefer not to have to deal with a drip feed of assets that will need investing piecemeal. ‘It just indicates that he wants to have a pot of money to invest all in one go.’
Sleep supposes that at the end of the offer period could involve the closure of a special discounted share class for early adopters; he has never seen an offer period for a new open-ended fund either, but has encountered such preferential deals for seed investors. Closing a share class, Sleep argued, would be ‘much more commercially sensible’ than stemming inflows altogether.
Woodford will also want to start with a substantial pot of assets to ease the burden of the fund’s administrative fixed costs, according to Sleep. ‘When you launch a fund, getting through that first £100 million is the hardest part. Once you are through that £100 million threshold, you are safe. It is then easier to spread the fixed costs in an economic fashion.’ Oliver agrees: ‘If you start with a small fund, you have to think about the total expense ratio.’
So how big could Woodford’s new fund get during this offer period? Sleep observes that Hargreaves Lansdown distributes flows of around £2 billion per quarter, and Cofunds about the same. He reckons Woodford could attract 10% of that, which could propel the fund to the £500 million very quickly.
To assess the opportunity set differently, in March (the latest month for which IMA figures are available) the UK Equity Income sector attracted £1.6 billion in gross sales (up from a month earlier) and UK All Companies £2.5 billion (up from £2.1 billion in February).
Oliver predicts that the offer period will bring in ‘well north of £100 million’ but ‘not anywhere near £1 billion’.
The offer period also serves as what marketing types deem a ‘call to action’: there is an implicit sense that investors have a limited window in which to buy. Should they jump in on day one?
Sexton sees no reason for Woodford aficionados to hesitate. ‘Why would you wait if you were a big fan of his? There is no point waiting for him to re-establish a three-year performance record.’
And is it a propitious time to be putting billions of pounds to work in the equity income sector? Sexton notes that the market has pulled back from some of its recent peaks. ‘It will probably be easier to start running that money on 1 June than it would have been on 1 January.’
Sleep observes that plenty of Woodford’s traditionally favoured sectors, such as tobacco, are still highly valued. But he maintains that there is value in the market, highlighting the oil majors like BP despite ‘its warts’.
Oliver nevertheless counsels against opting into Woodford’s new fund to make a short-term return, but does not envisage performance problems on any standard investment horizon – especially once the dividends are factored in. ‘But it is up to individual investors to decide whether to buy at these valuations,’ he concluded.