CF Woodford Equity Income passes £6bn mark

CF Woodford Equity Income has performed strongly and in June, a year after launch, was the top performer in the Investment Association (IA) UK Equity income sector with a return of nearly 20 per cent, a position it continues to hold. But analysts have mixed views on the effect the growth in assets will have on performance.

CF Woodford Equity Income 95 holdings with a significant allocation to smaller companies (3.3 per cent in small caps, 8.5 per cent in Aim and 5.1 per cent in unquoted companies). But as the fund grows they may account for a smaller percentage of the overall portfolio, according to Adrian Lowcock, head of investing at AXA Self Investor. Over the past year small caps have helped the fund's performance with the two holdings that contributed most to performance, Allied Minds (ALM) and 4D Pharma (DDDD), having a market cap of less than £1bn.

Brian Dennehy, managing director at FundExpert.co.uk, believes that future years might not be so stellar for Woodford Equity Income because of its growing size. He adds that while the fund's 33 per cent allocation to health and pharmaceuticals has done well so far, "this is quite a lot to hold in one sector". "While the sector has generally performed well investors should take note of that overweight as it would expose CF Woodford Equity Income to falls in the event of a sustained sell-off, although it has weathered the most recent dip. We would also like to see how his fund performs in different market conditions and that will come with time," he says.

But Mr Lowcock is not concerned. "Mr Woodford was managing over £30bn in the same strategy across a number of funds during his tenure at Invesco Perpetual," he says. "He therefore has plenty of scope to grow the fund. He has proven he is capable of running a significant amount of money in the UK equity income strategy and maintained impressive long term performance. At this level size is not an issue."

However, Mr Lowcock warns that the good performance is unlikely to continue uninterrupted. "Mr Woodford runs a high conviction portfolio and tends to have large holdings in specific companies and sectors, so does not follow any benchmark closely. As such he is likely to have periods where his performance will lag the FTSE All-Share and in the past we have seen these periods of underperformance have lasted years. However, his robust stock picking process with a focus on company fundamentals and valuation of the companies he invests in means over the longer term he is likely to deliver."

In February, Mr Woodford told Investors Chronicle: "When I left Invesco Perpetual I was running around £33bn, and there was substantially larger exposure to small caps then than I have now. I can continue to do what we have been doing with a much larger pool of assets - I am not short of ideas. We also don't try and turn the portfolio every year as investing in smaller companies requires a very long-term approach."

CF Woodford Equity Income has low turnover at only 16 per cent over the year to 30 June. The fund's management team set their investment strategy on a three to five year view but often invest in companies for much longer than that, so having a less traded smaller company is not necessarily a problem. Having lower trading costs also eats less into returns.

Mr Woodford has a strong record over time with the funds he ran at Invesco Perpetual, with Invesco Perpetual High Income (GB0033054015) returning 2,224 per cent between February 1988 and the end of September 2013, and Invesco Perpetual Income returning 1,723 per cent between October 1990 and the end of September 2013. Long-term investors may continue to do well with CF Woodford Equity Income Fund.

But if you want an alternative that is more focused on smaller companies equity income, consider Unicorn UK Income (GB00B9XQFW49), a recent IC tip. The fund had a difficult 2014 but it has a strong long-term track record and this year performance has picked up.

Source: Morningstar, *Trustnet, **Woodford Funds.

Performance

Source: Morningstar as at 7 August 2015

Top ten holdings as at 30 June 2015 (%)

Sector breakdown (%)