Neil Woodford has revealed a sense of bullishness ahead of the launch of his CF Woodford Income Focus fund, saying there appears to be more value in the UK market than he has seen in a long time.
The CF Woodford Income Focus fund will launch on 20 March, subject to regulatory approval, with a fixed offer period that ends on 12 April. The new offering will target high income generation with some capital growth.
The FE Alpha Manager went through a challenging time in 2016, with his £9.6bn CF Woodford Equity Income fund making a total return of just 3.19 per cent – ranking it in the IA UK Equity Income sector’s bottom quartile and well below the 16.75 per cent rise in the FSTE All Share index.
The fund remains the sector’s best performer since launch in June 2014 with a 30.24 per cent total return.
Performance of fund vs sector and index since launch
Source: FE Analytics
“Having had a very poor 2016, I am seeing more value in the stock market today than I have seen in a long time,” Woodford said.
“The growth we saw in the index last year was the product of a very narrow group of stocks doing very well. It was a very concentrated, narrow stock market last year. Many sectors performed very poorly and indeed the median stock in the FTSE 250 was down 4 per cent.
“People talk about a high valuation in the market and I don’t actually see that. The market looks fairly valued to me at an aggregate level – it’s not particularly cheap or particularly expensive.
“Not everything has done as well as Glencore or Anglo American. Many of the stocks that I look at were in a bear market last year. What I’m much more interested in are the opportunities that lay beneath those numbers.” 
Coupled with this is the manager’s optimism on the future of the UK economy. While many commentators expect the prospect of the country leaving the European Union to hit the economy hard, Woodford is more sanguine in his outlook.
“For a very long time post-financial crisis I have been seen as some sort of perma-bear. I have been more cautious about the global economy and the domestic economy than consensus. Weirdly, I now find myself in the unfamiliar circumstance of being slightly more bullish than consensus about the domestic economy,” he said.
“I wrote in the lead-up and aftermath of the Brexit vote that my view was that if Britain decided to leave the European Union, that wouldn’t be an existential threat to the economy. I think broadly the economy has surprised. I think increasingly the red faces amongst the official forecasters are getting even redder.”
This view prompted Woodford to think now is a good time to launch the CF Woodford Income Focus fund.
The emphasis on income differ the new fund in some ways from the CF Woodford Equity Income fund which is managed with a total return mindset. CF Woodford Income Focus will aim to deliver an income of 5p per share in 2018, equivalent to a yield of 5 per cent in that calendar year on the initial launch price of £1.
“I’ve never really thought of myself as an income manager; I think of myself as a total return manager with an income orientation,” the FE Alpha Manager said.
“[The new fund] is a product that will look and feel in some respects like the Equity Income fund, in that will reflect the conviction and approach that I have employed throughout my career.
“But it is a different product because it will be focused on delivering equity income. That means the portfolio has to look different because everything in the portfolio will be contributing to the delivery of current income as well as growth in income.”
As previously reported, the fund will have the ability to hold more in global stocks that the 20 per cent limit imposed on the existing IA UK Equity Income offering. This means it will reside in the IA Specialist sector.
“Over my career running funds there have been occasions when I have wanted to capture attractive valuations and yield in international markets and I wanted to embed that flexibility into this portfolio,” he said.
“In the past I have bumped into my 20 per cent overseas limit and I just don’t want to have that restriction.”
At launch, the fund is not likely to be “anyway near” 20 per cent in international equities as Woodford believes that he can fulfil his income aims with a portfolio of largely UK stocks. While he wants the flexibility to chase opportunities outside of the UK, the manager is adamant that the new fund will not eventually morph into a global portfolio.
“I’m not a global manager and I don’t pretend to be a global manager,” he said. “I think running global funds is a different skill set and requires a different approach, one that I wouldn’t want to embrace. That isn’t what we’re trying to do here – we just want to have that flexibility.”
CF Woodford Income Focus will be a more concentrated portfolio that his current offerings. The dummy portfolio currently has around 50 holdings, compared with 122 in CF Woodford Equity Income and 71 in his Patient Capital Trust.
Source: Woodford Investment Management, as at 31 Dec 2016
There will be a degree of overlap between the range, however. Around 15 of CF Woodford Income Focus’ prospective holdings are currently in the existing fund.
“There’s virtually no commonality between the Patient Capital Trust and the Income Focus fund, but there is some overlap with the Equity Income fund. But equally there is a bit where there is no commonality: new stocks, new exposures in the Income Focus fund that will not be in the Equity Income fund.”
Woodford is clear on the types of stocks that he is looking for in the new portfolio, even though he is not able to go into the details of positioning.
“What I’m looking for in this portfolio are businesses with good balance sheets, strong cash flows and dividend sustainability,” he explained.
“Dividend sustainability is very important. What would worry me is businesses that are essentially liquidating themselves to sustain dividends. So Shell and BP would be good examples. Those companies are not generating enough cash to fund their business and pay their dividends so they have to sell assets or increase their debt every year to sustain their dividends.”
Commenting on the CF Woodford Income Focus launch, Hargreaves Lansdown senior analyst Laith Khalaf said it is likely to “tick a lot of boxes for investors”, particularly those seeking an income from their investment portfolios.
“Woodford’s performance has been relatively weak in the last year or so, but investors shouldn’t let that deter them; his long-term record is peppered with periods of underperformance, yet he has delivered exceptional value for those who are willing to stick with him,” Khalaf added.
Performance of manager vs peer group composite since 1 Jan 2000
Source: FE Analytics
“If a manager takes a truly active approach to their portfolio, particularly in a contrarian fashion, there are inevitably times when the market takes off in a different direction. However, history tells us that in the end the market tends to come around to Neil Woodford’s way of thinking.
“The new fund will appeal to those investors prioritising income over growth, while the existing fund is more suited to those seeking long-term total returns.”