Woodford Considers High Income Equity Fund Launch

Neil Woodford has sent a letter to private investors and intermediaries to gauge appetite for a new UK equity income fund targeting a higher yield of 4.5%

Emma Wall 8 June, 2016 | 3:18PM
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Star UK equity investor Neil Woodford is considering launching a second income fund targeting a higher yield of 4.5%. The £9 billion Woodford Equity Income fund currently yields 3.96.

Woodford has sent a letter to private investors and intermediaries to gauge appetite for the proposed fund, which may call to investors’ minds his former fund Invesco Perpetual High Income. High Income has £11.6 billion under management and run by Mark Barnett, currently yielding 3.6%. Under Woodford’s stewardship the fund yielded as much as 8%.

“The proposed new fund would offer a consistently higher yield than the CF Woodford Equity Income Fund. It is anticipated that at least 85% of the assets within the portfolio will be dividend paying and as such, the fund will invest in quoted companies only,” the letter reads.

This differs from Woodford Equity Income, which invests up to 20% in unlisted companies and has returned 21% to investors since launch in June 2014. This compares to 7.4% for the Morningstar UK Equity Income category.

The new fund would have the ability to hold stocks listed outside of the UK.

“Although the higher yield would be achieved by investing primarily in UK-listed companies, we envisage that the fund would have no geographic constraints, giving Neil Woodford and his team the flexibility to invest to invest anywhere in the world where they identify a suitable investment opportunity,” the letter continues.

This global element will come as no surprise to close followers of Woodford, who earlier this year spoke about the increasing difficulties in finding high-quality income-paying UK stocks.

“The economy looks awful. We face a very difficult future,” he said in April. “Finding value and retaining a robust filter is harder than ever – fund management is a much more difficult job now than it has been in the past.”

Woodford would be following several other UK equity managers who are utilising their ability to look outside of the UK for income opportunities.

Morningstar fund analyst Peter Brunt said that while Woodford had made good use of the 20% non-UK listed flexibility that the Investment Association UK Equity Income sector allows, including US tobacco and European pharma names in the past, his expertise is first and foremost in UK-listed companies.

“Opening up the investment universe to globally-listed companies is good in terms of dividend yield diversification, but would present a different challenge in terms of research and portfolio construction,” Brunt continued.

“The prohibition of unquoted stocks would also be welcomed by investors who want to benefit from Neil’s investment skills but prefer full transparency and the highest levels of liquidity in a portfolio.”

A Reaction to Recent Reclassifications?

Craig Newman, chief executive, Woodford Investment Management confirmed the news saying: “We’re currently speaking to private investors, intermediaries and platforms to glean views and appetite for a new equity fund targeting a higher income.”

The success of Woodford Equity Income paves the way for a higher income fund. Year to date the fund has recorded inflows of £738 million – while the Morningstar UK equity income category has seen outflows of £99 million.

Despite this success Woodford has recently been threatened with the boot from the IA UK Equity Income sector as the fund’s yield for 2015 calendar year was 3.4%. Over the same period the FTSE All-Share yielded 3.7%.

If he was jettisoned from the sector, he would join a list including funds from Rathbones, Invesco Perpetual, Schroder and Henderson. There is some suggestion that the proposed new fund is a reaction to the stringent IA rules. 

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
Invesco UK Eq High Inc UK Inc317.98 GBP-0.59Rating
LF Equity Income C Sterling Acc3.47 GBP0.00

About Author

Emma Wall  is former Senior International Editor for Morningstar