Woodford biggest casualty as tide turns for equity income

Neil Woodford’s flagship equity income fund has been the worst performing in its sector over the past year, data has shown, but is not alone in seeing performance falter.

While it remains the largest in the Investment Association UK Equity Income Sector, standing at £8.7bn on 30 October, the CF Woodford Equity Income Fund has been the sector’s worst performer out of 87 listed products over one year according to FE Analytics data.

It has returned just 2.42% in a one-year period, FE data showed, falling far below the sector’s best performer, the MAN GLG UK Income which returned 25.8%, and nearly 10% below the sector average.

However, Woodford’s recent performance has hardly signalled an exception.

With the sector’s bias for value stocks struggling against booming growth strategies and tough environment for UK equity, many in the sector have failed to offer outperformance.

“The UK economy has faltered since the start of the year..."

The IA UK Equity Income sector as a whole has only just managed to beat the FTSE 100 over the year to date, rising 12.42% against the FTSE’s 12.06% rise, FE data has revealed.

Further analysis by the multi-manager team at BMO GAM also found returns from equity income has been the least consistent out of the 12 IA sectors, with only 1.3% of equity income funds managing to deliver above-median returns in each of the last three years.

Market swings leave equity income style in the cold

John Husselbee, head of multi-asset at Liontrust Asset Management, said market conditions had changed, with bond proxies seeing a sell-off, and the environment was turning against the traditional style of equity income managers.

“When you have cash returns giving out negative yields and bond returns doing not much more, the investor, particularly income investors, have gone to higher risk assets including equities.

“What we have seen is a bit of a rotation in markets,” he said.

Robin Geffen, CEO and founder of Neptune Investment Management, agreed and said the fragility of the UK economy had made it challenging for equity income investors.

“The UK economy has faltered since the start of the year,” he said.

Morningstar data compiled by Neptune revealed the proportion of equity income funds yielding 110% of the All Share fell from 87% in September 2016 to 48% in September 2017.

The percentage of funds yielding 100% of the All Share, the revised benchmark for entry to the IA sector, also fell from 96% to 81%.

It is not all doom and gloom, however, with Gary Potter, co-head of multi-manager at BMO, saying the future was bright for the sector despite there being a “number of moving parts” acting as headwinds.

“I think the sector is a victim of circumstance, not fundamentally flawed,” he said, and added that he expected the tide to turn in its favour within the next two years.

He added: “There’s been a lot of disappointment but I do not believe it is systemic. It’s just a moment in time where a number of pressures have combined.”

Impact of the cut to IA dividend threshold

Both Potter and Geffen note the IA’s decision to cut the dividend yield target for funds in the sector from 110% of the FTSE All Share to 100% in March this year as another pressure point for equity income managers.

Geffen holds a particularly strong view, going so far to accuse “many income managers” of deliberately reducing their yield in an effort to boost growth potential.

“Some funds now don’t even yield as much as the market,” he said.

“For income investors who have come to rely on equity income funds for a high and growing income stream, this is a massive risk. Deliberately sacrificing yield is more often than not going to result in falling dividends, and many could end up with less money than they expected.”

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