Woodford Equity Income – Review

Woodford Equity Income is one of three investment products provided by Woodford Investment Management, a company set up by Neil Woodford in 2014.

Neil Woodford is one of the most famous fund managers the UK has produced. He even received a CBE for services to the economy.

Woodford built his reputation during 26 years at Invesco Perpetual. He beat the market for a quarter of a century!

Woodford is a fundamental investor. He likes companies that are undervalued. He has been described as a contrarian and somebody who isn’t afraid to make big calls.

He famously refused to invest in technology stocks when they were rocketing during the late 90s and of course was proved right when the bubble burst in 2000.

In fact he might be in a similar situation right now. That is because all his funds have been under performing recently.

Some think he has lost his stock picking ability. Some go so far as to think he never had any! Rather, it was just down to luck and that luck has finally run out!

Others think this is a situation like 2000 where it is only a matter of time before Woodford is proved correct and his funds turn around and start outperforming.

Investors will need to make up their own mind up about this before they invest in one of his funds.

Of the three funds on offer from Woodford Investment Management, Woodford Equity Income is perhaps the most well known. It is also the first one to be launched. Here’s what Woodford Investment Management say about it:

• The original Woodford fund, completely focused on delivering attractive long-term returns for investors through investment in quality companies that can deliver sustainable dividend growth
• Investors expect a positive return and that is what we aim to deliver over the long term – protecting capital is key
• We aim to offer investors capital growth and a growing income stream, paid quarterly
• We focus on the long term – we don’t know what will happen tomorrow but we do know what drives markets over time

Don’t let this description fool you. Though this is less of an alternative investment to say Woodford Patient Capital Trust, it isn’t a vanilla fund by any means.

It contains small emerging companies to increase the likelihood of higher returns. Sounds good, but higher returns from smaller companies usually means increased risk.

If you are willing to take on risk for more reward then this might fund might be for you.

Woodford’s team go to a lot of trouble to be extremely transparent in everything they do, whether that be cost structures or the businesses they invest in.

In fact, they even post videos of Neil Woodford himself answering difficult questions about his funds underperformance.

Recently he’s been having to answer lots of difficult questions. No surprise, because Woodford Equity Income has underperformed quite badly recently. In fact, all his funds have.

Over the last three years the fund earned -2.2% compared to over 8% for the FTSE All Share Index.

Personally, I wouldn’t read too much into that, though. All funds and fund managers are going to have a period of underperformance. In fact, there’s a good chance funds that have underperformed will out perform in the future. You can read more about that here.

I’d feel more comfortable investing in a fund that was underperforming, rather than one that was outperforming. When funds underperform you can buy them cheaper, giving you higher returns if and when they turn it around. So all good so far!

But the Equity Income fund certainly won’t be for everyone. There are a number of potential problems I can see that might put certain investors off.

The first problem is that it is actively managed. In case you haven’t heard, the case for active management gets weaker by the day. You can read more about that here.

The next problem is that it focuses heavily in the UK. UK companies make up 86.47%. That’s great if you are bullish on UK companies, but not so great if you aren’t. It’s great if the UK economy does well, it might not be if it doesn’t.

Finally, the fund isn’t cheap or straightforward when it comes to pricing.

If you invest directly with Woodford you pay 1% for A class shares.

Alternatively, you can pay 0.65% for Z class, 0.75% for C class, and 1.5% for X class shares. You invest in these shares through financial advisors and fund platforms. The price you pay will depend up on the financial advisor or fund platform in question.

As a result it probably goes without saying that I wouldn’t recommend allocating too much of your portfolio to a fund like this.

I’m pretty sure most investors don’t need this fund. Simply, investing in a couple of passively managed funds will suffice. A global stock fund together with a government bond fund will provide a strong, simple portfolio for most investors.

That said, for investors who want to add a little more diversification to their portfolio and aren’t afraid of a little extra complexity, there maybe a place for one of Woodford’s other funds in their portfolio.