“While Neil Woodford is broadly targeting the same kind of opportunities as those of his Invesco Perpetual days, there is a greater exposure to stocks found at the lower end of the market-cap scale and to unquoted companies,” said Morningstar senior research analyst Peter Brunt.
“The bias to the former has become far more pronounced over the past couple of years, in part as a result of Woodford’s more positive view on the UK economy since first-quarter 2017.
“While the group has shown its ability to meet sizable redemptions over the past year, with the fund still standing at over £6bn, such extreme positioning in less-liquid parts of the market make it less nimble than competitors.”
Brunt also raised concerns about a number of high-conviction holdings that have experienced stock-specific problems over the past couple of years.
“While contrarian investing comes with a degree of risk and issues could be expected from time to time, the nature of some of the problems and respective position sizes in the portfolio give us cause for concern,” he said.
However, while Brunt said Morningstar’s conviction has waned, he said the fund still has long-term investment merit.
The downgrade comes just over week since Charles Stanley Direct confirmed it was dropping the fund from its recommended funds list due to concerns about Woodford’s exposure to early stage companies.
The fund has already suffered a difficult year as some of his largest listed holdings, like Provident Financial and Capita, have seen their share prices tank and he has lost the backing of significant investors from Jupiter Merlin to Aviva, Architas and LGT Vestra.
Morningstar rates funds on five criteria: process; performance; fund management team; parent company and price.
A bronze rating means the fund outperforms on only some of the criteria.