Would Woodford’s proposed higher income fund live up to its name?


A potential new equity income fund from Woodford Investment Management may struggle to live up to its higher income remit, according to industry experts, despite many describing it as a “logical next step” for star fund manager Neil Woodford.

Woodford Investment Management is currently surveying investors and intermediaries to see if the market would welcome the launch of a new fund before the end of the year.

At least 85 per cent of the assets within the new portfolio would be dividend paying and it would invest in quoted companies only, the firm says. Its existing equity income fund holds a mixture of public and closely-held companies.

It also anticipates a starting yield would be approximately 4.2 to 4.5 per cent, compared to the firm’s existing £8.7bn Woodford Equity Income fund.

AXA Wealth head of investing Adrian Lowcock says any new high income fund would need to be “significantly different” to Woodford’s exiting income fund to add value and would also need to honour the high income name and the fund objectives.

He says: “Woodford is an excellent manager and has proven successful at delivering returns for investors, however, he does so without the constraints of chasing yield for yield’s sake.

“A fund with a significantly higher yield will be more restricted and might not deliver the same long-term performance we have come to expect from Neil Woodford.”

At Invesco Perpetual, Woodford ran a higher income fund and the performance of that fund during the 10 years before his departure was very similar to the Invesco Perpetual Income fund, in terms of capital returns, dividends and volatility.

Lowcock says: “The income yield on the high income fund struggled to live up to its name and on many occasions was actually lower than the income fund as such many investors ended up with a product that did not live up to its name although the performance was still impressive.”

Hargreaves Lansdown senior analyst Laith Khalaf says the existing fund may have better total return prospects thanks to the inclusion of small unquoted companies which, while riskier, have lots of growth potential.

Chelsea Financial managing director Darius McDermott, who welcomes the move as “rational”, and says a higher yield will mean access to the same stocks of the existing fund without “that tail” of small unlisted stocks.

Khalaf adds: “A new fund would allow investors to choose whether they prefer to focus on total return or income, or indeed hedge their bets with a bit of both.”

Overall commentators say the new fund is a “logical step” for the star fund management.

Tilney Bestinvest investment strategy director Ben Seager-Scott says: “It’s certainly a logical next step for Woodford IM – the search for income has been a major theme in the era of ultra-low interest rates, and with no end in sight there’s every reason to think demand will remain strong for these kind of products.”

Thomson Reuters head of Lipper UK and Ireland research Jake Moeller says the new fund will be successful and suggests Woodford is “still a fund manager with drive and ambition”.

However, he says: “Maybe he is conscious of the size and capacity of the existing fund but [the decision] means he wants to diversify the fund house.”