Woodford Fund Could Be Jettisoned From Equity Income Sector

Challenging economic climate means one-year yield is below official sector requirement – despite strong returns for investors 

Emma Simon 1 March, 2016 | 3:29PM
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Neil Woodford’s flagship fund risks being expelled from the Investment Association’s UK Equity Income sector, as its one-year yield is below the sector’s target.

CF Woodford Equity Income, which launched in June 2014, has proved popular with many private investors, and is now worth £8.3 billion. The fund is rated Bronze by Morningstar analysts.

The fund’s yield for 2015 calendar year was 3.4%. Over the same period the FTSE All-Share yielded 3.7%. Under Investment Association rules funds in the Equity Income sector should yield 110% of the FTSE yield, over a three-year rolling basis.

However, investors in this fund do not need to panic. As this is a three-year requirement the fund is in no danger of being ejected from this sector this year, or next. The Investment Association can remove funds from this sector immediately if the yield is less than 90% of the FTSE yield, but at 3.4% Woodford’s fund just clears this 3.3% hurdle.

The manager, Neil Woodford, has always stated that the focus of the fund is long-term positive returns, achieved through a combination of capital return and sustainable income growth.  

Although the yield may have fallen short of the IA’s target, investors in this fund have seen a total return of 16.6% in 2015 – putting the fund first in its sector.  Over the same period the FTSE All Share fell by 0.15%, while the average equity income fund was up by 7.6%.

As analysts pointed out, a lower capital return would have pushed the yield upwards.

A spokesman for Woodford Investment Management said:  “We said we wanted to deliver a 4p income target per unit in the full 2015 calendar year, which we achieved, and provide long-term and sustainable income growth. This income forms an integral part of an attractive and positive long-term total return.”

The current market conditions are clearly challenging for investment funds looking to deliver income for investors. Barclays (BARC), for example, announced today that its dividend of 6.5p per share would be more than halved in 2016 and 2017. Woodford has previously said that the market’s overall yield is being distorted by unrealistic dividends in many sectors, and as a result has not held many banking, oil or resource stocks.

His previous Invesco Perpetual Fund – Invesco Perpetual Income and High Income – were both removed from the UK Equity Income sector in 2014, for failing to meet the three-year rolling target on income yield. Other funds to fall foul of this rule include St James’s Place UK High Income, and Schroders UK Equity Income fund, which was ejected from the sector last July. At the time its Nick Kirrage and Kevin Murphy called on the Investment Association to rethink its approach to the sector.  

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About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk