Since launching the CF Woodford Equity Income fund three years, star manager Neil Woodford has delivered some sector-topping returns and retained his popularity among both professional and private investors. 
Woodford left Invesco Perpetual after 26 years to launch his own business – Woodford Investment Management – in 2014. CF Woodford Equity Income was the first offering out of the boutique’s doors; it was followed by the Woodford Patient Capital Trust in April 2015 and, more recently, CF Woodford Income Focus.
CF Woodford Equity Income took in a record £1.6bn of inflows during its initial offer period in June 2014, leading Woodford Investment Management chief executive Craig Newman to say: “We are thrilled to have had such support from investors.”
The fund has remained a popular choice with investors and has now grown to more than £10bn in size. But how were investors rewarded for backing the new fund well before it had the three-year track record that many wait for?
Performance of CF Woodford Equity Income vs sector and index since launch
Source: FE Analytics
As the chart above shows, those who backed the fund at launch appear to have made a prudent decision. With a return of 38.85 per cent, CF Woodford Equity Income has not only beaten the FTSE All Share and its average IA UK Equity Income peer by a wide margin, but it’s been the best performing member of the sector as well.
Of course, healthy total returns are nothing new to those that have invested with the manager over the long term. Woodford managed the Invesco Perpetual High Income between 6 February 1988 and 5 March 2014 and the fund made 2,428.98 per cent against a 989.59 per cent return from the FTSE All Share.
The FE Invest team put the fund on is approved list despite its short history, highlighting the “outstanding” track record of Woodford.
“The keyword for the CF Woodford Equity Income fund is ‘consistency’. Despite his departure from Invesco Perpetual, Neil Woodford has maintained the same investment approach, which is based on a five-year strategic view on the economy,” the team said.
“Woodford has been highly consistent in his investment approach: after identifying both global and UK-centric trends, he begins his investment process with the definition of a robust five-year outlook, and then selects his stocks accordingly.”
While the fund’s top returns since launch have been impressive, they are not the only figures about the fund that stand out from its peers.
Of the 55 full months that we have data for at the time of writing, CF Woodford Equity Income was in positive territory for 23 of them with losses encountered in only 12 months. This is a top quartile showing from the fund and better than its average peer (14 loss-making months) and the index (13 loss-making months).
Monthly performance of CF Woodford Equity Income vs sector and index
Source: FE Analytics
FE Analytics shows that the fund is in the third quartile when it comes to annualised volatility – 9.39 per cent against 9.27 for the FTSE All Share and 8.50 per cent for average IA UK Equity Income fund. Likewise, its maximum loss is third quartile at 6.49 per cent (the sector’s is 5.40 per cent) but this is still better than the index’s 7.91 per cent.
That said, CF Woodford Equity Income is in the top quartile of its peer group when it comes to alpha generation relative to the FTSE All Share, downside risk, information ratio, maximum drawdown, maximum gain and risk-adjusted return as measured by the Sharpe, Sortino and Treynor ratios.
Looking at income and the fund has handed a payout of £1,015 to those who made an initial investment of £10,000 at launch. It is currently yielding 2.88 per cent compared with 3.46 per cent for the FTSE All Share, although Woodford’s style is more about total return than income alone.
While commentators highlight the consistency of Woodford’s approach, this does not mean the portfolio is static and there have been a number of key changes to positioning during the fund’s first three years.
At launch, the fund’s top 10 holdings were (in order to weighting) AstraZeneca, GlaxoSmithKline, British American Tobacco, BT, Imperial Tobacco, Roche, Imperial Innovations, Reynolds American, Rolls-Royce and Capita.
Today, only four of these – AstraZeneca, Imperial Brands (formerly Imperial Tobacco), British American Tobacco and Capita – remain in the 10 largest holdings and several of changes have been made.
Woodford sold Rolls-Royce in late 2015 after losing faith in its long-term business model and BT in August 2016 over concerns in its pension liabilities and its relationship with the regulator. The manager said nothing fundamental had changed at Roche, but he was simply seeing better opportunities elsewhere. Reynolds was taken over by British American Tobacco.
Source: Woodford Investment Management
Woodford added to positions in insurer Legal & General and sub-prime lender Provident Financial in 2016 after the UK voted to leave the EU. The stocks had fallen 30 per cent and 25 per cent respectively in the two days after the result was announced.
Most notably, Woodford sold out of GlaxoSmithKline – after a holding period of more than 15 years – last month, down to the manager’s frustration over the pharmaceutical giant’s refusal to split itself into separate, more specialised business units.
“My base assumption is that Glaxo remains a healthcare conglomerate with a sub-optimal business strategy, and shareholders face a cut to the dividend. These characteristics do not appeal to me as an investor,” he said at the time.
That came at the same time the manager bought Lloyds Banking Group, reflecting his bullish view of the UK economy. “We view Lloyds as a well-managed bank with a conservative approach to its balance sheet. Its valuation looks very attractive in our view, and it has the ability to pay a very healthy and growing level of dividend,” the firm explained.
Recent performance has seen the fund slipped down the sector rankings, it must be noted. CF Woodford Equity Income has made 14.14 per cent over the past 12 months, compared with a 19.11 per cent return from its average peer and a 24.96 per cent rise in the FSTE All Share; this puts the fund in the fourth quartile.
However, investors must be wary of reading too much into short-term underperformance, especially when the reasons for it can be explained. Woodford was open in highlighting that 2016’s lacklustre showing was down to his lack of exposure to the oil & gas sector and share-specific issues such as a sell-off in Capita.
Performance of CF Woodford Equity Income vs sector and index over 1yr
Source: FE Analytics
The FE Invest team pointed out that some short-term underperformance can be expected from a manager like Woodford, who has a resolutely long-term investment approach.
“Before investing in the fund, investors should agree with the manager’s long-term outlook as the manager does not take short-term price movements into consideration. The incredible success of the fund gives the manager confidence to maintain his strategic views,” it said.
“Finally, we recommend that investors be prepared for short periods of underperformance and judge its success over the long term.”
CF Woodford Equity Income has an ongoing charges figure (OCF) of 0.75 per cent.