The Woodford Equity Income fund could enjoy a two-stage benefit, if manager Neil Woodford’s recovery follows the path he is predicting, but fund selectors say investors looking for an immediate Brexit bounce should look beyond the star manager.
With recent media attention focused on the repositioning of the portfolio – skirting around the upper limit of his permitted exposure to unquoted companies – and the fund suffering outflows over the past couple of years, the group is, obviously, keen to quash any concerns.
But the shift further down the market-cap spectrum and into unquoted companies is not a new stance.
Woodford’s shift in strategy
In 2016, the group published a blog informing investors of its change in strategy, which said: “As an active, pragmatic fund manager with a flexible investment mandate, it isn’t unusual for Neil to evolve his portfolios over time, as the valuation opportunity set constantly changes….
“In other words, the fund has gradually moved down the market capitalisation spectrum as the opportunity set has evolved.”
The blog was written in 2016 but holds true today.
The £4.68bn Equity Income portfolio shows support for UK housebuilders, a sector that will clearly benefit from a more stable, post-Brexit economic upturn, with Barratt Developments, Taylor Wimpey and Countryside Properties all top-10 positions.
Brexit could deliver double market rebound
Several fund buyers believe Woodford has been under pressure of late and suggest his portfolio is something of a game of two halves.
Adrian Lowcock, head of personal investing at Willis Owen, says: “It appears he has positioned that portfolio as a Brexit bounce portfolio but the unquoted element won’t do that job.
“He has always been bullish on the UK compared with the average market view and has been quite confident with his view that Brexit will not be as negative as many people think – both of which I generally agree with.
“You can see the portfolio is positioned for that ‘Brexit bounce’, however with unlisted names, they don’t bounce on the back of Brexit, only bounce if they float, if there are more material investors in it, and the businesses do well.”
Of recovery expectations, he says: “His talk of a ‘spectacular’ rebound sounds like him probably feeling a bit of pressure. Neil Woodford is a contrarian manager; he does invest in a manner that will fall out of favour for a period.
“If his contrarian views play out, he is due a rebound but it could be that he’s looking at it in two parts: the initial Brexit bounce and then the capital inflows when reinvestment comes back into the UK, which will take longer.”
Best funds to play Brexit
Lowcock says there are better fund options available as pure Brexit plays, including Mark Barnett’s UK Equity Income fund at Invesco and Henry Dixon’s Man GLG UK Income fund.
“They are probably better positioned for a pure Brexit bounce, whereas Neil could get a bit of that and then a second bite of the cherry a couple of years down the line.”
Morningstar ranks Woodford Equity Income in the top decile of 350 active funds across its UK Equity Income, UK Flex Cap Equity and UK Large Cap Equity categories.
Peter Brunt, associate director, equity strategies, manager research at Morningstar, says 58% of Woodford’s allocation is exposed to UK revenues, versus the FTSE All-Share’s 28%.
He adds: “Based on this, the allocation to companies that derive their revenues from the UK is over twice that of the FTSE All-Share. Assuming a positive outcome from the Brexit situation would see a strong run from these domestically-focused names, then you could argue that the portfolio of LF Woodford Equity Income is well positioned to benefit.”
The unquoted names in the fund are not a play on the UK economy, instead supporting early-stage technology and biotechnology companies, with some intellectual property commercialisation names.
Brunt also names Barnett ‘s UK Income, UK High Income and UK Strategic Income funds as similarly exposed to UK revenues, with 60%, 59% and 59% respectively. Liontrust’s UK Growth fund sits at the lower end of the range, with just 24% exposure.
Ben Yearsley, director at Shore Financial Planning, is calling to sell Woodford Equity Income, preferring his Income Focus fund as a play on the UK, used alongside the Patient Capital trust. He also favours J O Hambro UK Equity Income, run by Clive Beagles and James Lowen, and Adrian Frost’s Artemis Income fund.
Boutique business
Lowcock says part of the pressure supposedly facing Woodford stems from running a boutique versus being employed at a group the size of Invesco.
“There is a big difference between running your own business and working for someone like Invesco, which will have a risk department that can stand up to any fund manager because that’s their job.
“I’m not saying he doesn’t try to address that, but when your name is above the door, you don’t have as strict a risk or compliance function. You can’t have that absolute certainty that they will say no to you,” says Lowcock.
“You’re also not as accountable. If you work for another employer you are fully accountable to them and have to report them. Ultimately if you are the firm and the boss, you are accountable to yourself, and that is a very hard thing to do.”
Woodford refuted Lowcock’s claim about the risk and compliance function not being as strict.
At Woodford Investment Management, it is broadly understood that Craig Newman is the one running the business, leaving Woodford to focus on running the money.
“We may share the characteristics of a boutique in that we manage a handful of mandates, but in many ways we share the characteristics of a major asset management firm. Our operational platform and support infrastructure are geared to managing large sums of money,” it says.
By outsourcing much of its operational requirement to third parties including Bloomberg, Northern Trust, Capita and Wilson & Partners, it allows Woodford to focus on running clients’ money with minimal distraction and “more capacity to manage money than he has ever had in his 30-year career.”
