Top of the class

Neil Woodford’s equity income fund has just celebrated its first birthday with a sector topping annual return of 17.2%. This was more than 10% higher than the average UK equity income fund and comfortably ahead of his two former Invesco Perpetual mandates.

Since it was launched on the 2nd of June 2014, CF Woodford Equity Income has attracted a colossal £6.1bn of assets under management. It is now the 39th largest open-ended fund covered by the UK Investment Association.

Woodford’s objective is to provide long-term appreciation by investing mainly in UK stocks, although up to 20% can be allocated internationally. The fund is also targeting a 10% higher yield than the FTSE All-Share index and is currently paying 4% with quarterly distributions.

Its top 10 holdings account for 47% of the portfolio and include the health care companies AstraZeneca and GlaxoSmithKline, as well as the tobacco stocks Imperial Tobacco, British American Tobacco and Reynolds American. These are long-term positions, which is why the turnover is so low.

The holdings reflect Woodford’s cautious view of the global economy. He believes that corporate earnings and share prices will come under pressure, with the latter having been inflated by the central bank policies of quantitative easing. To guard against this he has selected attractively valued businesses that can deliver sustainable growth regardless of the economic conditions.

One of the things that sets the fund apart from its peer group is the large number of small growth stocks. Many of these are early-stage health care and biotech companies, although there are also a number of technology businesses. The individual positions are all quite small, but they are perfectly capable of delivering large enough returns to make a noticeable difference.

Quantitative analysis by Hargreaves Lansdown suggests that the outperformance relative to the FTSE All-Share has been due to stock selection, particularly in relation to the small growth companies and the high yielding blue chips. The positive contribution from the sector positioning was mainly due to the significant overweights in health care and financials excluding the banks, as well as the avoidance of oil & gas.

Woodford made his reputation at Invesco Perpetual where he ran their Income fund from October 1990 until May 2014. Analysis by Killik & Co reveals that during this period he achieved an annualised compound return of 14.3%. This was around 5% per annum better than the FTSE All-Share index and the average UK Equity Income fund. It was also less volatile.

CF Woodford Equity Income has a similar mandate and although it is early days the fund seems well on its way to establishing an equally impressive track record.