Commodity rally causes Woodford Equity Income fund to underperform


The Woodford Equity Income Fund underperformed in April due to a rally in the market led by commodities, which the fund has avoided.

The fund returned -0.09 per cent for the month compared to 1.14 per cent for the FTSE All Share benchmark.

“We are increasingly convinced that this rally is unsustainable and will be short-lived, not least because of the dangerous and potentially harmful speculative behaviour in China’s commodity futures markets,” says head of investment communications Mitchell Fraser-Jones.

The fund has zero allocation to oil and gas compared to 11.15 per cent in the benchmark, and 0.1 per cent allocation to basic materials compared to the benchmark’s 5.5 per cent.

Allied Minds was the largest individual performance detractor for both the equity income and the Patient Capital funds, but the share price “remains below its fundamental value”, says Fraser-Jones.

The Woodford Equity Income Fund’s tobacco stocks Imperial Brands and Reynolds American suffered, but remain attractive in the fund manager’s view due to their “exceptional ability to generate and distribute cash to their shareholders”.

The fund added to Hostelworld, Vernalis, CityFibre and Capita during the month, and initiated positions in Equiniti and unquoted company ABLS Capital.

In contrast to the equity income fund, Woodford Patient Capital Trust delivered a positive return in April, although it is still down since its launch with a share price of 99.85p and net asset value including income of 92.56p.

In March, the trust announced it had suspended fundraising due to uncertainty and lower liquidity in markets.

Over its first year the trust’s net asset value dropped 2.6 per cent from 100p to 97.38p, mostly due to the large cap positions of the fund, which are more exposed to market swings, Woodford says.

In the past month, the Woodford Patient Capital Trust participated in a Theravance Biopharma share offering, while selling out of accident management service company Redde in order to reduce exposure to mature income-generating holdings.

This week, portfolio manager for the JP Morgan UK Equity Core fund James Illsley warned that active UK equity managers could see an end to years of outperformance if the commodities market continued to rebound.

Illsley argued active managers had been operating in a “macro sector market” for the past couple of years, meaning they only had to make the right sector calls to outperform – namely avoiding the slumped commodities-based equities that were bringing the FTSE 100 down.