Woodford fund set to fall out of UK Equity Income sector

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The Woodford Equity Income fund is set to fall out of the IA UK Equity Income sector if it continues its current investment approach, according to a new report from Hargreaves Lansdown.

The fund, managed by equity income star fund manager Neil Woodford, has delivered total returns of 25.4 per cent since inception, compared to 10 per cent for the FTSE All Share.

However, the report says strong capital growth rather than income has delivered most returns since the fund launched in June 2014.

An investment of £10,000 at launch would now be worth £12,539 with income reinvested, or £11,740 if the £760 income was taken. An investor who had reinvested income would therefore be £39 better off.

The IA sector, which is currently under review, requires funds to deliver an average yield of 110 per cent the FTSE All Share yield over three years.

The Hargreaves Lansdown report, published this week, says the fund’s sizeable exposure to small, lower-yielding companies caused the fund’s yield to fall short in its first financial year.

It continues: “Given that Neil Woodford does not intend on changing his approach we expect the fund will ultimately fall out of the sector. We don’t view this as a problem and indeed other high profile equity income funds have also done so in recent years.”

Invesco Perpetual’s income range, as well as the Schroder Income and Jupiter Responsible Income funds, all sit in the UK All Companies, rather than the UK Equity Income sector, for having produced insufficient income under the current rules.

The IA launched a consultation in April on the UK Equity Income sector, which proposed, among several options, lowering the bar for the yield fund managers must achieve to be included.

Woodford confirms it has submitted a response to the consultation.

Earlier this month, head of investment communications Mitchell Fraser-Jones said the fund was on track to deliver 4 per cent income based on the 100p share price at launch, but that due to capital growth the yield would be lower. The fund’s historic yield for the year ended 31 October is 3.4 per cent.

A spokesman from the IA says the consultation is ongoing and did not say when a decision on sector criteria would be made.