CF Woodford Equity Income Fund research update

Research Team | Mon 08 December 2014

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The temptation to obsess over short-term performance or tinker with investments in response to the latest news can be overwhelming. The temptation can even be strong among professional fund managers, which is why we tend to favour those with a well-defined approach, who back their ideas with conviction, and, importantly, take a long-term view.

Neil Woodford is a good example. He has been investing in out-of-favour companies, with robust earnings and strong cash flow, for over 25 years. Significant investments are made in individual stocks and sectors, while areas he doesn't like are avoided completely.

Short-term profits are of no interest and investments are made for the long term. It is this discipline, combined with some astute calls, that have given him an edge over other fund managers and contributed to his success, although there are no guarantees this can continue.

Neil Woodford has maintained this approach since launching the CF Woodford Equity Income Fund six months ago, in June 2014.

One of the sectors he is most positive on currently is healthcare and pharmaceuticals. Around a third of the portfolio is invested in this area, including in large companies such as AstraZeneca and GlaxoSmithKline. They are held both for their potential to pay attractive dividends and ability to discover new drugs, which could boost future profits.

Companies in the tobacco sector have also been invested in for their strong cash flows and potential to pay attractive dividends. Imperial Tobacco and British American Tobacco both feature among the top 10 investments.

While the majority of the fund is invested in larger companies, Neil Woodford is also demonstrating his commitment to long-term investing by holding some smaller companies. Here, the capital he provides can help fund the growth of the business, while he can use his experience and resources to nurture and develop the company, helping it reach its full potential.

These higher risk smaller businesses, some of which are not yet quoted on the stock market, have the potential to grow into the larger, high dividend-paying companies of tomorrow, although companies at an earlier stage of their development are at greater risk of failure. Neil Woodford recently provided an update on his investments in smaller and unquoted companies, which can be read here.

Our view on this fund

The CF Woodford Equity Income Fund reflects Neil Woodford's long-term attitude to investment. We believe he is one of the finest fund managers in the UK, but his concentrated, high-conviction approach will be out-of-favour at times and investors need the patience to take the rough with the smooth. At times its value will fall as well as rise, so it is possible that investors will get back less than they invested.

The fund's estimated yield is currently 4% and over the long term we are confident the fund can deliver an attractive income and capital growth. We are encouraged by the progress made since this fund was launched and while it is still early days we are happy for it to remain on the Wealth 150+ list of our favourite funds at the most attractive prices. The tiered charge to hold funds in the Vantage Service is a maximum of 0.45% per annum.

Update: Woodford Investment Management (WIM) announced yesterday that chief operating officer Nick Hamilton and chief legal compliance officer Gray Smith have resigned from the firm.

WIM have also hired senior personnel to strengthen the compliance, legal and operational functions, including Simon Osborne as head of compliance, Gavin St. John-Heath as chief risk and operations officer and James Newman as head of operations.

Strengthening the operations team is a positive step. There is no impact on the way Neil Woodford manages the fund and in our view investors should not be concerned.

Please note the fund's charges can be taken from capital, which can increase the yield but reduce the potential for capital growth.

Read Neil Woodford's article on choosing unquoted companies

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.