With the anticipated launch of a new income fund from Woodford Investment Management during the first quarter, what should investors expect from the veteran equity income investor?
The new fund will aim to deliver an income of 5p per share in its first full calendar year in 2018, after which it will target modest sustainable growth in per share income over a five-year rolling period.
An important caveat is that the fund will not target a specific yield, nor will there be any guarantee that a specific level of yield or income will be achieved over any given time period.
Yet, it is understood that investors should expect the fund to yield at least 20 per cent more than the income delivered by FTSE All Share index over a rolling five-year period.
A spokesperson for Woodford said: “Woodford Investment Management confirms that it intends to launch the CF Woodford Income Focus fund in March 2017, with a fixed-offer period. The dates will be confirmed in due course.”
Since the launch of the CF Woodford Equity Income fund in 2014, Neil Woodford has recorded impressive returns compared with his peers in the IA UK Equity Income sector.
Performance of fund versus sector & benchmark since launch
Source: FE Analytics
The fund has made 26.96 per cent since launch, compared with a 15.16 per cent gain for the average fund in the peer group and 15.39 per cent for the FTSE All Share index benchmark.
Performance was difficult for the fund last year, however, with it returning just 3.19 per cent compared with a 16.75 per cent gain for the benchmark.
Patrick Connolly, head of communications at Chase de Vere, said: “Woodford hasn’t performed well particularly well in 2016 but there is no arguing with the superb long-term track record.
“The only concern is that he is taking on another fund and whether he has started to stretch himself thinly, although he has successfully managed huge amounts of money in the past. It’s less of a concern than with any other manager.”
But with a strong focus on income, growth may not be the top priority for the manager initially.
CF Woodford Income Focus will have more flexibility than the UK-based CF Woodford Equity Income fund to invest globally. Managers already in the global equity income space have proved adept at generating returns over the past year.
Aided somewhat by falls in sterling, the average global equity income fund rose by 23.21 per cent over last year, compared with an 8.84 per cent gain for the average UK equity income fund.
Performance of sectors during 2016
Source: FE Analytics
Mark Dampier, head of investment research at Hargreaves Lansdown, said: “From a launch price of 100p, Woodford is aiming to provide a pretty punchy 5p income in 2018 and this will limit the opportunity for growth so for me this fund will be very much for those seeking and prioritising income over growth.
“This contrasts to the Woodford Equity Income, which is more growth orientated.”
The ability to invest further afield is likely to open up opportunities, however. The new fund will not be constrained by geographic region – although it will not invest in unquoted companies – and will appeal particularly against another potentially unsettled year in the UK market, as the British government prepares to exit the EU.
Ryan Hughes, head of fund selection at AJ Bell, said: “By specifically excluding unquoted stocks, the focus on income generation is clear while the flexibility to look overseas will also offer a much wider opportunity set should the UK economy falter in the face of potential headwinds from the forthcoming Brexit.”
Another potential concern is the manager’s ability to achieve a yield higher than the market. Although the fund is not aiming for a specific yield, this remains the basis for inclusion in the popular equity income sectors.
The CF Woodford Equity Income fund delivered a yield of 3.4 per cent for the year ended 31 December 2015, compared with 4.1 per cent on 110 per cent of the FTSE All Share yield, required for inclusion in the IA UK Equity Income sector.
However, for some, Woodford’s past stock picking ability is favoured over chasing yield.
“The 5p yield is going to be a challenge,” said Connolly. “If there was a compromise between him attaining a lower yield but picking the stocks he wants to invest in, then the right approach would be to pick the rick stocks. Even if that means a lower yield.”
With an expected launch date in March, the timing is opportune. Demand for income remains strong, particularly against the low interest rate backdrop of recent years.
The IA UK Equity Income sector recording net inflows of £925m in 2016, despite a challenging year for investors.
Although global equity income sector reported net outflows of £4m over 2016, not all global income funds are located in the sector.
“With the demand for income an ever increasing trend, it is little surprise that the new Income Focus fund will look to tap into that need,” said AJ Bell’s Hughes.
Dampier of Hargreaves Lansdown added: “With a million more people reaching age 65 by 2020 the need for income with interest rates so low has never been greater.”