Woodford reveals details of new income fund and explains his "tough" 2016

Woodford Income Focus fund will initially aim to deliver an income of 5p per unit a year, although will not target a specific yield. Mr Woodford will aim to grow the fund's dividend by low single-digit increases year on year. It launches on 20 March and the ongoing charge will range between 0.65 per cent and 1 per cent, depending on which share class you buy.

Mr Woodford says Woodford Income Focus will be the last fund he will personally manage at his firm, Woodford Investment Management. But investors may soon be able to invest in funds launched by this firm run by other managers - Woodford Investment Management is interviewing new talent with a view to building itself out to take on rival boutiques. But Mr Woodford said it was hard to find managers and analysts who hadn't been "ruined" by the industry, which "teaches them the wrong things".

The new fund will be ranked in the Investment Association Specialist sector, rather than the UK Equity Income sector like CF Woodford Equity Income, which means it will be able to invest more than 20 per cent of its assets in overseas listed stocks. But Mr Woodford said he was not planning on investing substantially overseas to generate extra yield, and ruled out using any other assets or derivatives to boost the income.

"I'm not a global manager and I wouldn't pretend to be," he says. "Running global funds is a different skillset and requires a different approach, and it is one that I wouldn't want to embrace. But I have bumped into my 20 per cent limit [on overseas shares] in the [CF Woodford Equity] Income fund before, and I do not want to have that restriction [with the new fund]."

However, at launch and in the immediate future Mr Woodford said the new fund wouldn't invest anywhere near 20 per cent of its assets in overseas shares. He denied, however, that the new fund was motivated by a marketing push and said it would be distinct to CF Woodford Equity Income, "with new stocks and new exposures which will not be in the latter fund".

Out of the 55-stock prospective portfolio he has drawn up for the new fund, between 15 and 20 stocks also feature in CF Woodford Equity Income.

Mr Woodford adds that Woodford Income Focus will be lower risk than CF Woodford Equity Income and Woodford Patient Capital Trust (WPCT), which include unlisted stocks. And every one of the roughly 50 holdings in Woodford Income Focus will have to generate dividends.

"There is probably more absolute risk in CF Woodford Equity Income because 25 per cent of it is invested in businesses that are not self-sustaining and cash-flow positive," he explains. "They are by definition more risky. It will look and feel in some respects like the [CF Woodford Equity] Income fund in that it will reflect the conviction and approach I have employed throughout my career, but will be different because everything in the portfolio will contribute to current yield. And the new fund sits at the other end of the risk spectrum to Woodford Patient Capital Trust."

With the new fund the onus for stock selection will be on companies with sustainable dividends. "Dividend sustainability is very important, so what would worry me are businesses essentially liquidating themselves in order to sustain dividends," explains Mr Woodford. "BP (BP.) and Shell (RDSA) are examples. They are not generating enough cash to fund the business and dividend, so are selling assets or increasing debt every year to sustain those dividends."

Tough year

Last year was not a good one for Mr Woodford's existing two funds. CF Woodford Equity Income returned 3.3 per cent while the FTSE All-Share gained 16.8 per cent. Mr Woodford said that it had been a "tough year", and that being underweight in mining and momentum stocks had resulted in this fund's underperformance.

"2016 was a difficult year from a relative performance point of view," he added. "I was not represented in sectors that performed really well and was represented in sectors that were the inverse of that. The momentum trades that dominated the markets last year were very much about resources and mining, and what tends to happen is healthcare gets shorted against those sectors, so we had a tough year. But I don't ever set out to tell investors to expect us to deliver good performance in discreet parcels in an even way over time."

Despite the FTSE 100 having reached new record highs in January 2017 and assertions of a frothy UK market, Mr Woodford said it had been "a very concentrated narrow stock market last year and many sectors performed very poorly. The median stock was down 4 per cent last year in the FTSE 250".

He added that he was seeing a wealth of undervalued stocks and had gone from being a "perma bear" to an optimist.

Performance of CF Woodford Equity income fund (GB00BLRZQB71)

Source: FE Analytics, as at 27.02.17