Looking at the figures, the “Woodford Effect” is rather obvious as investors placed their money behind a fund manager rather than a particular market or asset class. Thanks to the Woodford Equity Income Fund launch in June, the equity income sector attracted above-average money inflows.
But what do these high inflows mean for income investors? And on the other side, what is the impact on those who invest in funds in the UK All Companies sector?
Sector Situation
In the past three months, the biggest outflows by far have been from the Invesco Perpetual Income Fund which saw outflows of nearly £1.5bn, according to the latest estimates by FE Analytics. The Perpetual High Income Fund recorded the second-highest outflows in the sector, with £550m.
Following on from the two IP funds are the BlackRock Special Situations Fund with £292m outflows, the AXA Framlington UK Select Opportunities Fund with £152m, the Threadneedle Institutional Fund with £88m and the Halifax UK Growth Fund with £85m outflows.
Looking across all sectors, the IP Income Fund remains top of the list. In comparison, the next highest outflows were seen in the Scottish Widow International Bond Fund of around £1bn, followed by the Invesco Perpetual High Income Fund and the Threadneedle American Select with £355m and the Scottish Widow UK Fixed Interest Tracker.
“The lion share of this move is due to Woodford,” Tom Jemmett, fund analyst at Brewin Dolphin, said.
Also contributing was the poor performance of multi-cap strategy funds in the last half year.
“Multi-cap strategies suffered in the second quarter due to the sell-off of growth strategies. Investors rotated out of growth into value strategies, which is for example income,” he said.
But, it is the changes to the UK All Companies sector, that perhaps deserve some more interogation. Had these changes taken place a few months ago, this sector of the market would have been hardly implicated at all, as the three IP funds only joined it recently. IP confirmed that its High Income Fund would leave the UK Equity Income sector and move to the IMA UK All Companies sector from 31 March. This was followed by the Income and Strategic Income funds which were transferred later in the year.
The reason these funds moved IP said, was the similarities in the funds’ investment approach to equity investing, as well as the three year yield requirement restraint used to qualify for the IMA UK Equity Income sector.
Investor viewpoint
For the investor who has placed money into a fund that has moved from one sector to another, there are a few things to consider.
In order to be included in the Equity Income sector, the IMA stipulates that they need to deliver a historic yield on the distributable income in excess of 110% of the FTSE All Share yield at the fund's year end, while in the All Companies sector the requirement is an 80% investment in UK equities.
“The issue is the yield of the fund, it’s sacrificing yield for total return,” Laith Khalaf, senior analyst at Hargreaves Lansdown, said.
“The move could make a difference for pure income investors who want as much income as possible, they might prefer to go for a higher yield. But if income investors have an eye on total return, they probably went with the manager of the fund. At times the manager can reduce the yield to protect the fund,” he added.
Giving up on yield could offer advantages, Jemmett noted. “Yield discipline can be restrictive in terms of what the manager can do.”
Commenting on the outflows, the loss of money for the IP funds could in principal be a good thing for investors, according to Khalaf.
“It’s generally easier to run less money, considering these are funds with huge amounts of money. It gives more scope for investors to invest in a range of different companies. Although the fund group doesn’t want to lose money, this won’t make a material different. The silver lining is that the manager has less money to run, which is not necessarily a bad things for a large fund.”
How to play it
High income investors strictly looking for a certain high yield could see some disadvantages of being moved into the All Companies Sector. However, given the expertise of the active fund manager, aiming at total return rather than a certain amount of yield could result in profits and benefit the fund.
