Woodford Equity Income - a step in the right direction

Richard Troue | Fri 03 May 2019

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What’s happening?

On 1 March Neil Woodford announced a change to the way he invests in unquoted companies in the Woodford Equity Income Fund.

Today he committed to reducing the fund’s direct investments in unquoted and less liquid companies, such as those found on stock exchanges without much active trading, by the end of 2019.

In time, Woodford aims to sell out of the fund’s unlisted direct investments entirely and instead increase investment in the Woodford Patient Capital Trust. The trust was launched in 2015 to invest in promising businesses in the early stages of development, most of which aren’t listed on the stock market.

Woodford also has other options available to reduce the unquoted stocks exposure. Some of these companies have matured, and are eligible for a stock market listing, or are positions that Woodford says he would be looking to sell thanks to positive performance and institutional investor interest.

New investments in unquoted stocks will be made solely through Woodford Patient Capital.

Our view

We’ve been talking to Neil Woodford for some time about the proportion of unquoted companies in the Woodford Equity Income Fund, and have urged him to address the weighting of these stocks in his portfolio.

While the unquoted companies have been successful investments overall since the launch of the fund in June 2014, and positively contributed to fund performance, as these investments grew in number they added risk to the portfolio.

Woodford’s investment in these types of higher-risk stocks are part of his appeal, and an integral part of his past success – but we believe unquoted investments in a fund of this nature should be a cherry on the top, not a piece of the pie.

With this change in strategy, early-stage businesses can still contribute meaningfully to performance, but they should not derail the fund if they don’t do well.

Woodford’s recent performance

Neil Woodford is in the midst of his worst spell of performance in a career spanning more than three decades. But he has built his career by investing against the herd, and doing so with conviction. This is one of the reasons we’ve backed him – he’s shown an ability to make the big calls right, and when he does, investors profit.

This is not the first time in his career that Woodford has underperformed the market – but we have stuck with him through difficult times in the past and investors have been rewarded for their patience.

Woodford’s proven ability to perform through the market cycle means we retain our conviction in him to deliver excellent long-term performance and the fund remains on the Wealth 50. Like all investments it can fall as well as rise in value so you could get back less than you put in.

Not your typical income fund

Woodford has invested in a collection of businesses he thinks are undervalued. Some pay dividends, some don’t. He aims to pay some income, grow that income over the long term, and grow the value of your investment too.

Overall he’s got less invested in large companies than at virtually any point in his career as he sees less opportunity for growth in this part of the market. This means the fund is likely to be more volatile than a typical equity income fund.

Investing for long-term success

We always suggest you hold a diversified spread of investments across asset classes and geographies. This means a single fund can’t derail the performance of your whole portfolio.

How much of your money you invest in a single fund is an individual decision. You need to allocate enough for the fund to contribute positively when it performs well, but not so much that a slump keeps you awake at night.

Remember too that a well-diversified portfolio should include different fund management styles. This means not all will perform well at the same time, but instead should help smooth returns over time. If all your funds perform in a similar way, rising and falling in value together, they’re probably too exposed to the same risks and your portfolio is not adequately diversified.

Past performance is not a guide to the future. Source: Lipper IM to 30/04/19. *full year performance data not available

More about WOODFORD EQUITY INCOME, INCLUDING CHARGES

WOODFORD EQUITY INCOME KEY INVESTOR INFORMATION