Woodford Equity Income Fund – 12 month review

Heather Ferguson | Thu 22 December 2016

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• A bias to small and medium companies remains
• The manager continues to favour financial and healthcare companies
• While long term performance remains outstanding, the fund has underperformed over the past year

Our View

Neil Woodford is a high conviction, long term investor. All managers undergo periods where their style is out of favour and they will underperform their peers or benchmark. We have faith in the manager to spot opportunities other investors have missed and trust him to add value for investors over the long term.

Review of 2016

Since launch in June 2014, the Woodford Equity Income Fund has returned 25.4% compared with 10.6% for the average fund in the UK Equity Income sector and 10% for the FTSE All Share Index. The majority of this outperformance was achieved in the fund’s first 18 months. Since January this year, performance has been lacklustre, with the fund returning 0.8% compared with 5% for its peers and 11.2%** for the FTSE All Share Index. Please note past performance is not a guide to future returns.



Past performance is not a guide to future returns.

Source Lipper IM **to 30/11/16

Annual Percentage Growth
	Nov 11 - Nov 12	Nov 12 - Nov 13	Nov 13 - Nov 14	Nov 14 - Nov 15	Nov 15 - Nov 16
CF Woodford Equity Income	N/A*	N/A*	N/A*	17.84	-0.53
FTSE All-Share	12.14	19.8	4.71	0.64	9.77
IA UK Equity Income	14.37	23.62	5.08	5.76	4.55

*Full year performance figures before this date not available

The strong performance of the FTSE All Share Index this year has been dominated by a recovery in commodity prices. Mining and oil & gas companies account for 19% of the index and have rallied as a result of improved commodity prices. The Woodford Equity Income Fund has no exposure to these sectors and so has not partaken in this recovery – this positioning accounts for around half the fund’s underperformance relative to the index.

Elsewhere, the fund’s exposure to domestically-focussed small and medium-sized companies held back performance in the aftermath of the UK’s decision to leave the European Union. These stocks fell behind companies with high levels of overseas earnings, which were seen as less dependent on the UK economy.

The past 12 months has also seen the fund suffer a few stock specific issues. Capita, Next, Circassia Pharmaceuticals and Northwest Biotherapeutics are among some of the fund's biggest detractors from performance.

Capita’s profit warning in September saw the share price fall by 26.7% in one day. The Brexit vote was blamed for the pace of business slowing, while the group also reported other problems, such as a legal row with the Co-op.

Shares in clothing company Next have struggled against weaker sterling as they import the majority of their products. This, combined with growing fears that inflation will start to bite next year, has caused investors to avoid the company.

The failure of its high profile, stage 3 study into a cat allergy vaccination saw shares in Circassia Pharmaceuticals plummet earlier this year. While the vaccination had high levels of success and a good safety profile, the trial results showed a dramatic placebo effect - whether the subjects had been administered the drug or a placebo, the trial results showed broadly the same impact on symptoms.

US Pharmaceutical company Northwest Biotherapeutics has been plagued by governance issues and Woodford IM initiated an investigation and changes to the board of directors last year. A full resolution of the company’s problems has not been forthcoming and the manager is not seeking to provide any further capital to the business at this time.

There is a Dutch proverb that says ‘a handful of patience is worth more than a bushel of brains.’ There have been many periods during Neil Woodford’s career when investors have questioned his strategy. His willingness to follow his convictions rather than herd instinct has seen him make some big calls, many of which have taken time to come to fruition. His decision to avoid technology companies during the 1999 technology boom held back his performance relative to his peers and the index, for example. However, he stuck to his belief that technology companies were overvalued and invested in tobacco companies, which had been overlooked by other investors who felt litigation and regulation spelt the end of the industry.

This was painful for his investors who saw other managers generating superior returns through technology while they lost money in tobacco stocks. However, after a few years of poor performance, his outlook proved correct – technology companies fell drastically in the infamous dotcom bust and tobacco companies recovered strongly as investors appreciated the strong earnings potential and monopolistic environment enjoyed by tobacco companies.

Neil Woodford remains confident he can uncover value among higher risk smaller companies and those in the healthcare and alternative financials space. We retain our faith in his ability to add value for investors over the long term and the fund remains on the Wealth 150 list of our favourite funds across the major sectors.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.