LF Woodford Income Focus caught in the crossfire

A number of brokers report an increasing trend of outflows from LF Woodford Income Focus. Interactive Investor said that over the past 12 months, on average, for every £1 invested in LF Woodford Income Focus almost £4 has been withdrawn. Charles Stanley reported that that between end of December 2018 and end of May 2019, the quantity of units their customers had in LF Woodford Income Focus fell by an estimated 10 per cent, albeit less than the 20 per cent fall in quantity of units their customers had in LF Woodford Equity Income Fund (GB00BLRZQB71). And AJ Bell said that it had seen an increase in redemptions from Woodford Income Focus over the past couple of months, in particular during the past couple of weeks.

All of LF Woodford Income Focus’s holdings are quoted meaning they are likely to be easier to sell than unquoted holdings, such those held by LF Woodford Equity Income. This means that LF Woodford Income Focus is less at risk of being suspended from trading due to investors pulling out their money. However, LF Woodford Income Focus has exposure to medium-sized and smaller companies, which are typically less liquid than the larger companies many UK equity income funds focus on.

“Being listed doesn’t mean a share is very liquid,” says Darius McDermott, managing director at broker Chelsea Financial Services. “And although LF Woodford Income Focus is more large-cap-focused [than LF Woodford Equity Income] and has no unquoteds, it has exposure to mid and small caps.”

This is one of the reasons why Chelsea Financial Services changed its rating on this fund and LF Woodford Equity Income from ‘Hold’ to ‘Switch’ last month – before the latter was suspended from trading. “Performance was not good and we were aware that redemptions were increasing,” says Mr McDermott. “If a fund is consistently in redemption it is very hard to run, as the manager is not looking at how to make money but how to meet the redemptions. While the [Woodford] funds are in redemption they will stay on a switch rating.”

LF Woodford Income Focus has also come under pressure over the past few days due as the share prices of quoted holdings it has in common with LF Woodford Equity Income have fallen. At the end of April, 27 of LF Woodford Income Focus’s 42 holdings – which accounted for about 72 per cent of its assets – were also held by LF Woodford Equity Income.

The composition of the latter fund is now being changed, with a focus on selling the unquoted holdings. Woodford Investment Management has also recently sold listed stocks, although it is not clear which Woodford funds disposed of them. These include NewRiver REIT (NRR), LF Woodford Income Focus’s largest holding, and Watkin Jones (WJG), which are also held by LF Woodford Equity Income. Woodford Investment Management has also sold shares in Purplebricks (PURP), which was held by both funds, and Woodford Patient Capital Trust (WPCT) at the end of April.

Holdings in bold were also held by LF Woodford Equity Income as a 30 April 2019

It will not be so easy to compare the funds' holdings to each other going forward because as of 10 June Woodford Investment Management ceased to disclose the full list of holdings in its three funds until trading in LF Woodford Equity Income Fund resumes. It is now only showing the top 10 in line with what most other funds do. Woodford Investment Management said: “During the period of the LF Woodford Equity Income Fund’s suspension and subsequent repositioning of its portfolio, we will only be showing the top 10 holdings of our three funds. We firmly believe this is in the best interests of investors.”

LF Woodford Income Focus’s performance has not been good since its launch, with the fund down 8.65 per cent between 12 April 2017 and 30 April 2019, during which time the FTSE All-Share index increased 9.65 per cent and the Investment Association (IA) UK Equity Income sector average return was 5.86 per cent. LF Woodford Income Focus lost 20.25 per cent in 2018, putting it among eight of the worst-performing UK equity funds during that year. But over the first five months of 2019 it made 0.32 per cent, according to broker Willis Owen.

“This shows that Woodford’s performance woes are not only due to holding unlisted stocks,” said Adrian Lowcock, head of personal investments at Willis Owen. “While Woodford’s view on the British economy has largely been accurate, the fund’s positioning suffered when we reached high levels of Brexit uncertainty, such as in December and again this May, when Theresa May announced her resignation. Overall, the worst [UK equity fund] performers from 2018 have fared okay in 2019 – a reminder that short-term poor performance is not a good reason to sell a fund. The worst performers [in 2018] tended to invest in the more volatile, riskier mid-cap and smaller companies, and have unconstrained portfolios that do not follow benchmarks. These types of funds are likely to suffer more in sell-offs driven by short-term changes in sentiment as investors sell first and ask questions later.”

Last week Neil Woodford said that LF Woodford Income Focus "is positioned for the economic and market environment that we are likely to see over the medium and long term".

The fund also has a high 12-month yield of 6.22 per cent.

However, this fund faces problems other than exposure to UK-domestic facing companies.

“I would be quite cautious of LF Woodford Income Focus because of the outflows,” said David Liddell, chief executive of IpsoFacto Investor. “I fear in the short term things will be very difficult and investors who are a bit cautious could consider switching into another fund.

Mr Lowcock added: “Perhaps the biggest issue is whether Neil Woodford is under too much pressure, and distracted [by having to deal with LF Woodford Equity Income] from his ability to deliver. I don’t expect a run on LF Woodford Income Focus. But do you want contrarian risk, stock selection [issues] and the distraction of LF Woodford Equity Income? There are lots of risks with LF Woodford Income Focus for investors, so do you want to take them on when there are lots of UK equity income funds that don’t carry those risks? You want a fund manager who can just focus on stock selection and is not distracted.”

Alternatives

If you are looking for a UK equity income fund to put your money into instead of the Woodford funds, see the IC Top 100 Funds at www.investorschronicle.co.uk/top-100-funds/.

Mr Lowcock, meanwhile, suggests the following.

Man GLG UK Income (GB00B0117D35)

“This fund offers a highly-disciplined, value-focused approach to investing in UK equity income,” said Mr Lowcock. "[Its manager] Henry Dixon's proven value approach underpins this fund. He targets companies trading below his team’s estimate of the company’s asset value and those where the company’s profit stream is being undervalued relative to the cost of capital, with a dividend yield of at least that of the market. The fund also targets companies with net cash balance sheets and strong free cash flows, which can lead to positive dividend surprises. As well as the focus on valuation, the process seeks to steer the manager towards elements of quality and positive earnings momentum. The fund also has a greater focus on mid-sized companies [than some of its sector peers].”

Threadneedle UK Equity Income (GB00BDZYJV10)

“The fund’s manager, Richard Colwell, has the flexibility to invest in both growth and value style ideas to meet his objective of delivering a capital return as well a steady income,” said Mr Lowcock. “His primary focus is on stock selection and he has a mix of high-quality companies, with strong cash generation, and out-of-favour companies with recovery potential, which may not pay a dividend. The fund is unconstrained but is predominantly invested in large blue-chip companies, although the manager will take significant sector bets against the index according to his thematic views.”

Troy Trojan Income (GB00BZ6CQ176)

“This fund is managed by Francis Brooke in line with the conservative investment philosophy of Troy Asset Management,” said Mr Lowcock. “The company has a long history in wealth management and its investment process is designed to preserve investors' capital by careful management of risk. Mr Brooke uses strict criteria to identify high-quality companies that can produce steady long-term income and capital growth. Holdings are selected from the FTSE 350, but there is a bias to companies at the larger end of this universe. The screening process results in overweight positions in defensive sectors such as healthcare and low exposure to cyclicals. Valuations drive the entry and exit points for stocks, although turnover is low. The proven strategy has delivered impressive returns and a healthy yield.”