CF Woodford Equity Income fund three years on: Were investors right to follow him?

 
Darius McDermott
Neil Woodford (Source: Getty )

There are few names in the investment world that ever come close to being household.

The likes of Warren Buffett, Anthony Bolton and Neil Woodford are in a very select group.

So when the latter announced that he was leaving Invesco Perpetual after a very successful 25-year career, in which he accrued more than £25bn in the funds he ran – and many loyal followers – it was big news.

Should I stay or should I go?

The – quite literal – million-dollar question was: should investors follow Woodford to his new venture, or stay put?

A large number decided to take the leap of faith. When the much anticipated CF Woodford Equity Income fund was launched just under three years ago, it attracted an initial £1.6bn. Hindsight is a wonderful thing and, in this case, those investors have been rewarded.

At the time of writing, the fund is the best performing in its sector since launch. It has beaten the other 77 funds in its category, returning almost 35 per cent – compared with an average of 22.8 per cent – and turning a £1,000 investment into £1,347.

Its assets under management today stand at more than £10bn.

Ups and downs

It hasn’t all been smooth sailing, though. Most of the fund’s best returns came in the first year or so, while 2016 was more frustrating.

But this is normal. Even the very best fund managers have times when things don’t go their way.

If, like Neil, you didn’t own oil and gas companies or banks last year, performance took a knock, as these sectors bounced back from their lows.

Instead, he favoured healthcare and tobacco companies. He has consistently had an overweight position in these sectors and, over the three years of the fund’s life, they have been less volatile and generally better rewarding.

There have also been a couple of individual stock issues in the early-stage business portion of the fund.

But in aggregate, this small selection of investments has punched well above its weight in terms of adding value to the overall portfolio.

Health Campaigners Call For A Tobacco Levy To Help Smokers Quit
Woodford picked healthcare and tobacco companies, rather than energy or banking (Source: Getty)

What does the future hold?

Neil is actually more positive today about the outlook for UK equities than he was three years ago. He thinks the market has been too pessimistic post the EU referendum and, while we’re still not in a “normal” economic environment, and the valuation of the UK’s stock market is quite high, he still believes our companies can thrive and deliver over the long term. You just have to pick the right ones.

Why invest in a UK equity income fund today?

UK equity income funds tend to be more defensive in nature than funds looking purely for growth, which can mean that they fall less than the wider market if there is a downturn.

The dividend stream also has a huge impact on performance over time. For example, over the past 30 years, dividends have accounted for three-quarters of total returns from the FTSE 100.

And if you don’t want to reinvest the dividends, but take them as an income instead, the UK’s stock market yield of 4.2 per cent can look very attractive compared with cash accounts paying less than 1 per cent.

While the majority of the UK’s dividends are paid by our biggest companies (half of the dividends from the FTSE 100 are forecast to be paid out by just seven companies this year), our medium and smaller companies also tend to be very disciplined when it comes to returning value to shareholders. The dividend payments may not be as big, but they do have a good reputation for steadily growing them.

Biggest isn’t always best

There are some potential problems of which to be aware, however. Dividend cover – the measure of a company’s ability to continue to pay a dividend rather than cut it or stop it – is not great among our larger companies.

A number of cuts were looking likely pre-referendum, and it is only the fall in our currency that has helped some companies continue to pay them.

If the pound has reached its bottom, and starts to appreciate against the dollar, the profits of our larger companies will be squeezed once again.

High levels of dividends can also be a warning. The UK’s banks had some very high dividends in 2007 but almost all were forced to stop paying them when the global financial crisis hit. Some of the highest levels today can be found in the oil and gas sector which, with the oil price remaining very low, is also under pressure.

So it is important for investors to consider whether the dividends they want to receive are sustainable and growing.

A couple of funds I really like in this respect are Standard Life Investments UK Equity Income Unconstrained, and Rathbone Income. The former has grown its dividend by 100 per cent over the past six years and the latter has managed to grow its dividend in 20 of the past 21 years.

Darius McDermott is managing director at Chelsea Financial Services. His views are his own and do not constitute financial advice.

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