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Woodford's flagship fund ejected from Equity Income sector

Woodford's flagship fund ejected from Equity Income sector

Neil Woodford's flagship equity income fund has been removed from the Investment Association's (IA) Equity Income sector. 

The news followed an IA warning at the end of last year that the LF Woodford Equity Income fund would lose its place in the sector if it did not up its yield to at least 100% of the FTSE All Share's yield. 

According to the IA, the fund's three-year average yield to the end of December stands at 3.5% versus 3.6% on the FTSE All Share. 

Woodford Investment Management (WIM) said in its discussions with the IA that it had recommended removing the yield target, as it does not reflect dividend growth potential. 

However, the IA has stuck to its guns, forcing the fund to move to the UK All Companies sector. The Woodford Income Focus fund is in the Specialist sector and will remain there.  

A WIM spokesperson told Wealth Manager: '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.' 

WIM also pointed out that Woodford's main focus is on income per share, rather than overall yield. 

'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,' the spokesperson person said

'From the outset, Neil said he would aim to deliver [income of] 4p based on the launch price of £1 and grow that income each year. That commitment remains [see table below].

'However, we recognise that managing the equity income fund in this way is always likely to be challenged by the parameters set by the IA for its equity income sector, and subsequently we are comfortable that the fund will now sit in the UK All Companies sector.'

Average pence per share across share classes*
Year Price
2015 4.0259p
2016 4.0993p
2017 4.1798p

*Source: Northern Trust 

The fund joins a number of competitors to be removed by the IA from the sector recently. These include Woodford's former Invesco Perpetual High Income and Income funds (now run by Mark Barnett), Evenlode Income, Montanaro UK Income, Jupiter Responsible Income and HC Charteris Premium Income

Hargreaves Lansdown senior analyst Laith Khalaf  highlighted that Woodford currently sees more opportunities in naturally lower-yielding companies than he has historically.

These businesses tend to be innovative, but higher risk, smaller and mid-sized, which Woodford believes one day will have the potential to lead their markets. 

Khalaf said: 'This fund places an emphasis on long term total returns, and so Neil 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.' 

The news comes as Woodford undergoes one of the most difficult periods in his fund career, with assets in the fund sinking from a peak of just over £10 billion to £6.8 billion. 

Over the 12 months to the end of February the fund has lost 9.2% versus an average gain of 3.3% in the equity income sector. Over three years it has returned 3.6% versus the 14.4% average return in the peer group.

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