Despite star manager Neil Woodford’s stellar reputation, even his biggest fans have been surprised at the strength of the performance of his CF Woodford Equity Income fund since its launch in June last year.
Over this time frame, the fund has delivered a return of 21.55 per cent, almost tripling the performance of its sector average and outperforming its FTSE All Share benchmark more than six times over.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Given Woodford’s (pictured) reputation and his new fund’s performance so far, it is no surprise that the FE Alpha Manager has taken on substantial inflows. 
According to new data, however, the fund is now £6.74bn in size and is bigger than Woodford’s former Invesco Perpetual Income fund, which is £6.45bn according to Invesco's latest figures to the end of June.
How much bigger can the fund get while retaining its performance?
Many financial experts don’t seem to think this is a worry and that there is still room for growth.
Ryan Hughes, fund manager at Apollo Multi Asset Management, said: “Neil Woodford has a great track record of managing large funds and has proved over a long period that fund size has not been a barrier to generating great long term returns.”
“At Invesco Perpetual Neil managed over £25bn and therefore has significant headroom to grow his new fund which currently stands at more than £6bn. While I think it is clear that Neil doesn’t want to manage as much as he did at Invesco, there is still plenty of scale left in Neil's approach.”
Justine Fearns, research manager at Chase de Vere, says that she has seen plenty of large funds perform well over the years and, for every piece of evidence suggesting larger funds do not perform as well as smaller funds, there is probably a large fund continuing to perform well.
“How long is a piece of string? It is more about the experience of the people running the money, the underlying investment philosophy and process and the operational structure that determines whether or not a fund will be able to deliver positive performance over time. However, to give a vaguely direct answer, we would say, probably lots [of growth room],” she said.
What makes the fund’s large size unusual is the amount of smaller companies it holds – in fact, nearly 50 per cent of the 94-stock fund’s performance has been achieved through stocks in the FTSE Small Cap index.
Larger funds with significant weightings in small-caps often hold either a very high number of stocks or are small in size to avoid liquidity constraints.
It could be argued that, if the fund were to continue getting bigger, small-caps will make up a less significant proportion of the fund’s weighting and this could affect performance.
“I would expect the amount in smaller companies to fall as the fund size gets bigger,” Adrian Lowcock, head of investing at AXA Wealth, said.
“Woodford has in the past been a significant shareholder in small companies, taking on occasions 30 or 40 per cent stakes in businesses, but they remain small holdings compared to the overall fund size. Woodford has previously run the strategy as a core larger companies fund with a long tail of small and micro-cap businesses.”
However, Hargreaves Lansdown’s Laith Khalaf doesn’t believe that the proportion of the fund’s returns from small-caps will necessarily alter, regardless of how much of the fund is invested in them.
“As the fund grows we may see the smaller companies still playing an important, but less significant role in the portfolio. Bear in mind that even while these companies may occupy only a small slice of the fund, they have the potential to rise significantly in value, and so have an impact on performance that is not commensurate with their size in it,” he explained.
From the perspective of many investors, it is hard not to remain bullish on a fund manager who achieved a return of 2,403.65 per cent over his 26-year tenure of Invesco Perpetual High Income, now managed by FE Alpha Manager Mark Barnett.
Performance of fund vs index under Woodford
Source: FE Analytics
That means the fund outperformed the FTSE All Share by 1,414.06 percentage points over that time, and Woodford’s track record of outperformance hasn’t shown signs of slowing since launching CF Woodford Equity Income.
Ben Willis, head of research at Whitechurch Securities, bought into the fund as soon as it was created and also invested with Woodford when he was running his Invesco Perpetual income funds.
“I don’t think there’s an issue with him running the fund at the size it’s at because he’s done it and he’s done it for years,” Willis said.
According to FE Analytics, Woodford was running more than £25bn across his three open-ended income funds at their peak in mid-2013 (£14.5bn in High Income, £10.8bn in Income and £1.2bn in SJP UK High Income). He also had ran similar strategies across his investment trusts and the mixed asset funds he managed with Paul Causer and Paul Read.
Willis added: “He obviously doesn’t have Invesco behind him anymore, but I’m sure he was acutely aware of that when he set up on his own and probably hired the best people he could,” he said.
“His track record is phenomenal and he’s the best UK equity manager at the moment. Obviously his fund has been very good since launch and has even excelled what we expected.”
Willis says that the fund is a core position in Whitechurch’s portfolios and will be a long-term holding. He adds that, as the fund gets bigger, there will undoubtedly be periods of underperformance due to the star manager’s top-down, high-conviction views.
“You might worry about fund size with anyone else, but I think it’s slightly different because Woodford has [managed large portfolios] for years.
“There were periods with super tanker Invesco Perpetual [High Income] where he struggled to actually change the direction of it – it’s not going to be quick and it’s not going to be easy, hence why it suits investors who take longer term views and are looking for longer term positions.”
“It’s something to keep on monitoring though. He doesn’t have the same resources that he did at Invesco Perpetual, but there are no concerns from us here at the moment.”
Over the last 12 months, CF Woodford Equity Income has achieved a top-decile alpha ratio and Sharpe ratio, which measures risk-adjusted performance.
The fund is currently in the second quartile for its annualised volatility and has achieved a top-quartile maximum drawdown, which measures greatest peak-to-trough difference in performance.
The fund currently has a clean ongoing charges figure (OCF) of 0.75 per cent.
