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Smallers on the agenda for CF Woodford Equity Income

IC Top 100 Funds update: Fund manager Neil Woodford says the size of his equity income fund will not prevent it from investing in smaller companies

CF Woodford Equity Income (GB00BLRZQ513) is the second-best performing fund in the UK Equity Income sector since launch in June 2014, with a return of 11.5 per cent, according to Hargreaves Lansdown data. The IC Top 100 Fund has also been very successful in attracting assets. At the end of January it had £4.7bn in assets under management.

A concern with funds, particularly those looking to invest in smaller companies (a part of CF Woodford Equity Income's portfolio), is that when they get too large they will not be able to do this. This is because funds don't want to hold too much of one individual company so large funds can't get meaningful exposure to smaller companies.

However, Mr Woodford argues: "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."

He also argues that having invested for 10 years in unquoted companies, and early-stage ones for even longer, "he has learnt a lot over that time".

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"The demand for capital from early-stage companies and early-growth companies is high, but the supply is low," he says. "The returns on capital deployed, therefore, are potentially attractive. Valuations of companies in this space are on the floor."

Mr Woodford says while the UK has some of the best universities in the world, developing some of the best intellectual property, it does not have a good track record of converting this into long-term commercial success. And the main reason for this is a lack of long-term capital.

He doesn't invest with the expectation of exiting his unquoted holdings, and says an initial public offering (IPO) by one of these could be an opportunity to put more money in. But he adds that there are circumstances where it is good to sell or reduce an unquoted holding.

CF Woodford Equity Income focuses on listed equity but has 15 unquoted companies in its portfolio. Mr Woodford says that "he is looking at lots and lots of opportunities as it is well known I will invest in early-stage businesses", and he currently has 12 potential investments in the pipeline. These include many medical opportunities, which Mr Woodford says reflects "the fact that the UK is good at medical science", although he adds that there is a cross-section of businesses including, for example, disruptive alternative finance companies.

He already has some listed exposure to this area via Provident Financial (PFG) which focuses on the non-standard lending market and accounts for 2 per cent of assets.

He is also interested in peer-to-peer lending and has recently invested in P2P Global Investments C share issue (P2PC) which accounted for 0.82 per cent of assets at the end of January. This is an investment trust that invests in peer-to-peer loans. He is also interested in investing in peer-to-peer platforms and would consider getting exposure to both listed and unlisted companies in this area.

"Young internet-savvy consumers find this means of financing more convenient and people are being driven to look at alternative forms of finance," he says.

CF Woodford Equity Income's holdings also include Purple Bricks, an online estate agent which accounts for 0.15 per cent of assets.

Gigaclear, meanwhile, accounting for 0.21 per cent of CF Woodford Equity Income's assets, provides broadband to rural areas of the UK. The company was founded in 2010 and now has nine rural community networks live with 10 more in construction in Oxfordshire and Kent.

Mr Woodford also looks at unquoted and early-stage opportunities in the US, and says that around half of what he has so far is from the US. However, he adds that he has "to think about balancing the portfolio".

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In terms of the large-cap equity income shares CF Woodford Equity Income focuses on, Mr Woodford says that "it is a tough environment in which to deliver attractive returns but we continue to believe there are always undervalued assets". "The opportunity set is much more restricted than it has been for ages but we are confident we can deliver," he says. "The most important thing is earnings risk which means there is more stock-specific risk than there has been for ages. Earnings are more volatile.

"You really have to hunt for value among equity income shares but it is perfectly possible to find them: there are plenty of opportunities but this is where an active manager comes into it."


IA SECTOR:UK Equity Income SET-UP DATE: 2 June 2014
FUND TYPE:Open-ended investment company ONGOING CHARGE: 1%

Source: Morningstar & * Woodford Investment Management

Sector break down (as at 31 January 2015)

Consumer goods16.8
Consumer services3.9

Top 40 holdings (as at 31 January 2015)

Imperial Tobacco6.8
British American Tobacco6.4
Reynolds American3.2
BAE Systems3.2
Allied Minds2.9
Legal & General2.3
Provident Financial2.0
Royal Mail2.0
Imperial Innovations1.4
Babcock International1.2
Spire Healthcare1.2
Game Digital1.0
Biofem 'A'0.9
P2P Global Investments 'C'0.8
4D Pharma0.8
Stratified Medical0.7
Cosmederm Bioscience0.7
Northwest Biotherapeutics0.6

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