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Should You Buy Neil Woodford's Fund?

ASK THE EXPERT: Legendary UK equity income fund manager Neil Woodford launches his eponymous fund this month. But should you buy it?

Emma Wall 5 June, 2014 | 9:23AM
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Eight months after Neil Woodford announced his shock departure from Invesco Perpetual, investors have a chance to entrust the UK equity income guru with their cash once more. On June 19, CF Woodford Equity Income Fund will open its doors to the public, although Woodford fanatics can pre-order the fund through various fund supermarkets today.

Woodford has promised investors that the new fund’s portfolio will feature many of the names he has held over the last 25 years at Invesco. The new Woodford fund will be targeting a 4% yield with aims to grow the yield to a “high single digit”.

As well as key players investors will be familiar with such as pharmaceutical stocks and tobacco companies there will be an allocation to unlisted equities, particularly with a technology and innovation theme. Unlisted and micro-cap equities is a sector that Woodford feels passionate about and it is widely expected that he will launch a private equity fund in the near future. A second fund launch has been referenced by Woodford himself, although no date or portfolio information has been released.

While Woodford’s performance is indubitable, many of his core holdings have rallied significantly since he last bought them. Names such as British American Tobacco (BATS) have rallied 112% over the past five years, and pharmaceuticals – which Woodford championed when nobody else would, have rallied too. GlaxoSmithKline (GSK) is up 53% over five years.

Woodford’s style has served him and his investors extremely well over the last two decades – but because of this, many of the holdings we have come to expect in his portfolio will not be as cheap as they were last time he bought them. And if they are not as cheap, investors should not expect them to offer the same level of returns.

Speaking at a recent dinner Woodford said that while he appreciated the market had rallied he still considered there to be value in the names he loves.

“This is not a 2000 stock market parallel where everything is overvalued. There are some remarkably overvalued sectors, but that doesn’t mean there isn’t value to be found,” he said.

Woodford himself says this is “Woodford Funds as a company will be a very different offering – but expect business as usual when it comes to stock selection and the running of the new income fund”.

But there is something new for potential investors this time around. Woodford is investing in banks for the first time in a decade, buying HBSC (HSBA) last summer for his mandate with wealth manager St James’ Place.

Should You Buy the Woodford Equity Income Fund?

It is not as simple as deciding whether Woodford is a good quality fund manager, with a peer-beating track record – he is, and he does.

But many investors will still own Invesco Perpetual Income, and Invesco Perpetual High Income, now both run by Mark Barnett. While assets under management between the two did fall following Woodford’s departure, there’s still a cool £21 billion between them.

Woodford has said himself his style will not be changing, so why sell a fund that has worked for you and risk incurring capital gains tax on your – probably sizable – profit?

Brian Dennehy of FundExpert.co.uk says that investors should sit tight and wait to see how Woodford’s new fund performs before investing.

“The performance of a new fund in the first 12-24 months is typically driven by luck rather than the skill of the fund manager, even if it is Neil Woodford,” Dennehy said. “The accident of when the fund is launched drives early performance; and, if we are honest, none of us, not even Neil, knows what will drive markets in that period.”

Wealth manager Philippa Gee agreed saying that the potential of a falling market will mean she is sitting tight before recommending the fund to clients, and will be regularly reviewing the situation.

Chelsea Financial Services’ Darius McDermott says that investors who already hold the Invesco Perpetual funds have a choice to make.

“If you haven't moved yet, and aren't an ardent Woodford fan, then why not stay and see what Mark can do? On the other hand, if you are a Woodford fan, and have been waiting to see what his new venture is, then we'd say what's the point in waiting? Move now,” he said.

But Jason Hollands of BestInvest said that investors should make the call based on the sector and style, rather than the man himself.

“Investors should buy the fund only if you think it is a good time to be investing new money into UK equities and want a defensive fund, or want to switch existing UK funds in more racier strategies into a more cautious approach,” he said.

Investors should note that while they can allocate their cash to Woodford Funds during the current offer period, the fund manager is restricted from investing by regulation until the launch on June 19.

Hollands added: “There has been such a blitz of coverage about this launch it would be easy to think this is a limited opportunity. It isn't. This is an open ended fund that will never be small and nimble as huge assets will be in the fund at launch.”

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
British American Tobacco PLC2,625.50 GBP0.00Rating
GlaxoSmithKline PLC1,554.80 GBP0.00Rating
HSBC Holdings PLC437.30 GBP0.00Rating
Invesco UK Eq High Inc UK Inc325.30 GBP0.48Rating
Invesco UK Equity Inc UK Inc1,283.14 GBP0.27Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar