IA ejects LF Woodford Equity Income from income sector

To be included in the IA UK Equity Income sector a fund must deliver a higher income than the FTSE All-Share index over rolling three-year periods. And LF Woodford Equity Income's three-year average yield at the end of December 2017 was 3.5 per cent, below the FTSE All-Share Index's 3.6 per cent yield. Funds can also be removed if they do not achieve 90 per cent of the index's yield over one year.

The development comes at a difficult time for its manager, Neil Woodford, one of the most highly regarded fund managers due to his three-decade successful record at Invesco Perpetual. Last year, a string of individual stock blow-ups coupled with Mr Woodford's bullish stance on the UK economy led to some large institutional investors deserting the fund – reducing its size from £10bn to £6.6bn today.

A Woodford Investment Management spokesperson said: "Throughout his 30-year investment career, Neil has focused on delivering positive long-term total returns through a combination of income and capital growth for his flagship equity income funds. He believes this strategy is in the best interests of his investors, has never been willing to sacrifice capital to supplement income in the short term and his portfolio construction isn't dictated by yield considerations."

Woodford Investment Management also said that the fund's focus is on achieving income per share rather than a specific yield, and growing that income each year. It added that during last year's IA consultation on the UK Equity Income sector it recommended removing the headline yield target because it does not think that this captures the impact of dividend growth over the long term. As a result, it is "comfortable" with the fund's move to the IA UK All Companies sector.

A number of other funds have been ejected from the IA UK Equity Income sector over the past few years. They include Invesco Perpetual Income (GB00BJ04HX60) and High Income (GB00BJ04HQ93) run by Mark Barnett, and TB Evenlode Income (GB00BD0B7D55), Montanaro UK Income (IE00BYSRYZ31), Jupiter Responsible Income (GB00B5ZWNT55) and HC Charteris Premium Income (GB00BYZKJ383).

Darius McDermott, managing director at Chelsea Financial Services, said the sector move did not concern him and investors should also not overreact to recent short-term poor performance.

"When Neil Woodford was at Invesco [his funds] fell out of the IA UK Equity Income sector, so it's happened before," said Mr McDermott. "Neil, and actually any good manager, won't just be buying stocks for the yield so that they can stay in the [UK Equity Income] sector."

Laith Khalaf, senior analyst at Hargreaves Lansdown, added that investors should see fund sectors as a rough guide to what a fund does and not as a substitute for understanding its manager's style.

"LF Woodford Equity Income places an emphasis on long-term total returns, so Neil Woodford is willing to give up some income now in return for longer-term growth prospects," he explained. "Investments [include] innovative, but higher risk, smaller and mid-sized businesses that lead, or have the potential to lead, their market."

At present these companies are low yielding, but this could change as they grow. And despite last year's poor performance, Mr Khalaf still backs the fund.

"Neil Woodford has turned £1 into almost £27 over his entire career, compared with £12 by the UK stock market, and that long-term record shouldn't be ignored," he said.

But if you want a fund with more of an income focus, options include LF Woodford Income Focus (GB00BD9X6V34), which launched last year. This fund sits in the IA Specialist sector because it has the option of investing more outside the UK.

LF Woodford Equity Income Fund (GB00BLRZQB71)

Source: Morningstar as at 27/03/18, *Woodford Investment Management as at 28/02/18

Performance

Source: Hargreaves Lansdown/FE Analytics

Top 10 holdings as at 28/02/18 (%)

Source: Woodford Investment Management

Sector breakdown as at 28/02/18 (%)

Source: Woodford Investment Management