Woodford Investment Management’s flagship LF Woodford Equity Income fund has been stripped of its coveted five FE Crown rating and awarded just one crown in the first of 2018’s rebalancings. 
The rebalance of the ratings system has just taken place and the closely watched fund is one of a handful to see their five FE Crown rating lowered to one, while the IA UK Equity Income sector has become one of the worst hunting grounds for top-rated funds.
FE Crown Fund Ratings are a quantitative measure that are designed to help investors to distinguish between funds that are strongly outperforming their benchmark and those that are not. They examine a fund’s stockpicking, consistency of outperformance against a credible benchmark and achievement of results compared with risk.
The top 10 per cent of funds are awarded five FE Crowns, the next 15 per cent receive four crowns and each of the remaining three quartiles are given three, two and one crowns respectively.
Rolling 1yr performance of fund vs sector since launch
Source: FE Analytics
Neil Woodford’s £8bn LF Woodford Equity Income fund has underperformed both the average IA UK Equity Income member and the FTSE All Share over the three years to the end of 2017. It has returned 20.84 per cent over this time, while its average peer is up by 28.68 per cent and the index has gained 33.34 per cent.
This is a stark turnaround from previous circumstances; until the summer of 2017, the fund had tended to be the highest returner of the peer group over multiple time frames. The above chart shows the fund’s 12-month total returns over rolling monthly periods and where they fall in the overall sector rankings.
Robert Wilson, research assistant at FE, said: “The last six months have had a tremendously negative impact on the LF Woodford Equity Income fund’s three-year numbers. FE Crown scores are built on an alpha-based test, a volatility score and a consistency score and on all these metrics, the fund has disappointed over three years.
“There have been well-documented poor stock picks, an increase in the volatility of the fund and two consecutive quarters of negative performance.”
However, many commentators have pointed out that Woodford’s valuation-based approach and macro-analysis mean that short-term periods of underperformance can be expected. Indeed, the manager’s reluctance to buy overvalued tech stocks meant he effectively avoided the dotcom crash while he stayed away from financials in the run-up to the financial crisis.
In a recent update, the manager said he will continue to go against the consensus as he believes that some parts of the market have been pushed to bubble-like valuations by years of ultra-loose monetary policy.
“As a value-orientated investor there are tough times, no more so than when markets are momentum driven as they have been for some time now – but valuation is the only catalyst for investment returns that I have ever trusted,” he said.
“That’s why my investment strategy will continue to be based on a rational, disciplined analysis of the fundamentals of individual businesses, broader industries and the economies in which they operate.”
Performance of funds vs sector and index over 3yrs to 31 Dec 2017
Source: FE Analytics
However, LF Woodford Equity Income isn’t the only UK equity income fund to suffer a downgrade in the latest FE Crown rebalance. Both Rathbone Income and Trojan Income have seen their five-crown ratings cut to two, while Threadneedle UK Equity Income, HL Multi Manager Income & Growth and LF Canlife UK Equity Income have moved from four crowns to two.
FE’s Wilson said: “There’s been no let-up in the IA UK Equity Income sector’s troubles in the past six months. Concentration risk continued to wreak havoc – almost half of UK dividends come from a handful of companies – and managers not effectively managing this have been burnt.”
The downgrades in the peer group mean that just 2.60 per cent of the IA UK Equity Income sector’s members hold five FE Crowns. This is the third lowest level in the Investment Association universe; only IA North American Smaller Companies and IA Global Equity Income are worse off with a respective 0 and 2.44 per cent of their members holding the top rating.
Indeed, just two members of the IA UK Equity Income sector now hold the maximum rating of five FE Crowns: Man GLG UK Income and LF Miton UK Multi Cap Income.
FE Alpha Manager Henry Dixon’s £346.5m Man GLG UK Income fund has been upgraded from four FE Crowns to five in the rebalance. The fund has posted top decile returns over the past one-, three- and five-year time frames.
The portfolio is managed with a value-based approach, which Dixon honed during his time at asset manager Matterley, where he ran the firm’s flagship fund. Man GLG UK Income is currently overweight insurance, real estate and consumer durables & apparel, with Royal Dutch Shell, British American Tobacco and Total SA making up the largest individual holdings in the portfolio.
LF Miton UK Multi Cap Income, which is run by Gervais Williams and FE Alpha Manager Martin Turner has retained its five FE Crown rating. The £1bn fund is another that is in the IA UK Equity Income sector’s top quartile over one, three and five years.
Performance of funds vs sector and index over 3yrs to 31 Dec 2017
Source: FE Analytics
The FE Invest team, which has included the fund on its Approved List, said: “Gervais Williams and Martin Turner adopt a highly distinctive approach to running an equity income portfolio. Their area of expertise is to identify smaller companies which are able to grow irrespective of the market element.
“They use this edge to build an income-orientated portfolio. Their approach is robust, as highlighted by the fund’s track record of growing dividends and achieving strong capital gains.”
Man GLG UK Income has an ongoing charges figure (OCF) of 0.90 per cent and is yielding 4.15 per cent. LF Miton UK Multi Cap Income has a 0.81 per cent OCF and yields 3.87 per cent.