The Woodford Equity Income fund has seen the size of its assets shrink by over £4bn over the last 12 months, taking it down from £10.1bn last June to its current £6.0bn. It has had continuous outflows since May 2017 with the most recent monthly data from June showing net redemptions of £217m.
In contrast, Yarrow’s fund brought in £66m that month, according to data from Morningstar.
Jupiter Merlin, one of the earliest backers of Yarrow’s debut fund, gradually added £300m from its former Woodford stake. Architas has £13m invested in the fund in its Active Multi Asset range, £4m in the Multi-Manager UK Equity fund and a further £15m in the Blended Multi Asset range.
Yarrow’s fund has posted net inflows for the last 10 consecutive months. Morningstar did not have flow data stretching back further as the fund’s oldest share class was started in September 2017.
Its largest inflows were last October and November (£126m and £201m respectively) around the time Evenlode Income received an injection from Jupiter Merlin and Architas.
Value to defensive
The rotation out of Woodford into Yarrow (pictured) represents a style shift from growth to defensives, says Ryan Hughes, head of active portfolios at AJ Bell.
“You’ve literally gone from one extreme to the other,” says Hughes.
“Hugh Yarrow focuses on very profitable companies that have got low capital intensity and are very lowly leveraged.
“When you look at some of the holdings in Woodford’s fund, it is very, very different – early start-ups with no profitability that are requiring a lot of capital and are quite highly leveraged.”
Stock stumbles
Performance has clearly been a driving factor in the diverging fortunes of Woodford and Yarrow.
Yarrow soft closed Evenlode Income after it reached £2bn in March this year. The fund, now £2.4bn in size, has been first quartile over one, three and five years against the IA UK Equity Income sector.
Woodford vs Evenlode
| Fund | Returns year-to-date | 1-yr | 3-yr | 5-yr |
| Woodford Equity Income | -5.94% | -9.5% | 0.4% | N/A |
| Evenlode Income | 7.02% | 12.7% | 47.2% | 78.5% |
Woodford has suffered several stock specific mishaps over the last year.
Peter Brunt, senior analyst of manager research at Morningstar notes four stocks – Provident Financial, Prothena Corp, Theravance Biopharma and Capita – accounted for half of the fund’s underperformance during the period.
Brunt says the portfolio has been hurt by a lack of exposure to companies in materials and energy, the best-performing UK sectors, as he instead focuses on pharmaceuticals and biotech, plus domestically-focused stocks, where he has sought value opportunities.
“The former have faced industry headwinds and the latter have seen uncertainty over the Brexit outcome continue to weigh heavily on investor sentiment.”
Tobacco giant Imperial Brands, a defensive name, makes up 8.81% of the portfolio. However, Woodford has been piling more cyclical names into the portfolio since Brexit and financials now make up 36.99% of the fund. This was one of the reasons his fund was dropped from Tilney’s best buy list in March.
Brunt adds: “While contrarian investing comes with a degree of risk and issues could be expected from time to time, the nature of some of the stock specific problems and respective position sizes in the portfolio have given us cause for concern.”
Morningstar downgraded Woodford Equity Income to bronze in May.
Investor anxieties
Architas dropped Woodford Equity Income because the multi-asset team was concerned about its exposure to bond proxies in a potentially higher interest rate environment, according to senior investment manager Nathan Sweeney.
The multi-manager has sold down equity income exposure across Europe and the US, in addition to the UK. Sweeney says they are rotating into funds with a focus on “high quality companies with strong balance sheets and good cash flows”.
JO Hambro UK Equity Income fund is the sole UK equity income fund remaining in its active multi-asset range.
Jupiter declined to comment on why it sold the fund after 20-years of investing with the star manager.
AJ Bell’s Hughes says increased chatter around being late in the equity cycle, a pickup in volatility and Brexit headwinds indicate that managers are keen to reduce beta in their UK exposure.
“You would imagine if markets got a little volatile, the types of businesses Hugh Yarrow owns, given those characteristics, would act as quite defensive holdings,” he says.
Woodford Investment Management declined to comment.
