At £11.9bn, the fund is one of the largest products available to UK retail investors and over the years Mr Woodford has likely been forced to adapt his style to accomodate the size of the fund.
The manager also runs the £9.1bn Invesco Income fund, which shares many similar holdings with the High Income fund – ramping up the scale of his overall strategy.
Ben Willis, investment manager and head of research at Whitechurch Securities, argues: “Due to the amount he manages, Mr Woodford now has to take some longer term views on the markets than most of his peers as size limits the ability to enter and exit positions.
“Because of this, it is reasonable to expect periods of short-term relative underperformance. However, his exceptional long-term track record highlights how his astute long-term positioning has paid off admirably in the past.”
At the end of January, Sanlam Private Investments downgraded both funds to a ‘sell’ rating, arguing that the amount of money Mr Woodford manages has led to the strategy becoming “very focused in many of the large stocks in the market”.
Mr Woodford’s products were not the only ones to get downgraded. Tony Nutt’s Jupiter Income fund, Newton’s Higher Income fund, and Standard Life Investments’ UK Equity Income Unconstrained fund also made the ‘sell’ list.
The report noted a preference for “managers who are able to be more pragmatic in the face of swiftly changing circumstances”.
Ben Seager Scott, senior research analyst at Bestinvest, argues that Mr Woodford would struggle to run his strategy effectively at the smaller end of the company-size spectrum to “any significant degree”.
He adds: “However, the large-cap space has a lot of liquidity. To offset some of the limitations of this size, the manager is also making significant use of his mandate’s ability to hunt away from his benchmark, particularly in his favoured sectors of pharmaceuticals and tobacco.”
Out of the past five calendar years, the High Income fund has ranked as bottom quartile when compared to its sector peers in three, according to FE Analytics data.
Mr Seager-Scott adds: “Investors should understand the manager’s style, which tends towards a more conservative investment approach, avoiding highly cyclical stocks, therefore the fund is likely to underperform when markets are being driven higher by pro-cyclical rallies.”
However, Darius McDermott, managing director at Chelsea Financial Services, argues that Mr Woodford’s process remains effective.
“Mr Woodford does run a lot of money, but he also has very low turnover and hence is generally only trading 20-25 per cent of his portfolio each year, so it is manageable. He is one of a very select group of managers who run that amount of money successfully.
“The fund hasn’t performed quite as well in the past couple of years, but this has been due to his defensive stance, not the size of the fund. Indeed, both his funds were first and second in the sector in 2011 – the year after High Income topped the £10bn mark.”
It is this that drives Whitechurch’s Mr Willis to the conclusion that Mr Woodford’s funds should not be held in isolation within a portfolio.
“I would certainly see him as a core position but would hold other complementary equity income funds alongside,” he explains.
There is no clear answer to the question of what size a fund should be allowed to reach before it becomes impossible to manage effectively or, more to the point, at which point those capacity constraints harm performance enough to justify closing the fund to new investments.
Mr McDermott is confident Invesco Perpetual will step in at some point.
“We are confident that he will stop taking new money if he feels the size is starting to become detrimental to existing investors,” he says.
Mr Willis adds: “There will be a time when Mr Woodford will step down, though this could be some time away. However, just like succession planning, I imagine Invesco have in place some kind of ‘heir apparent’ or grooming process for a replacement for that eventuality, as that just makes business sense.”
Invesco Perpetual failed to respond to requests for comment within the timescale provided.
Jenny Lowe is features editor at Investment Adviser
ALTERNATIVE INCOME FUNDS
Threadneedle UK Equity Income
Managed by Leigh Harrison (pictured) and Richard Colwell, this £1.7bn fund has a more neutral management style, according to Bestinvest’s senior research analyst Ben Seager-Scott. The managers are conviction led and focus on companies that are likely to benefit from changes in global economies and stockmarkets.
Schroder Income
According to Ben Willis, Whitechurch’s investment manager and head of research, the £1.13bn Schroder Income fund, managed by “young and up-and-coming managers Nick Kirrage (pictured) and
Kevin Murphy”, has a similar style to that of Neil Woodford. The managers follow a deep-value, contrarian approach, investing in areas they consider to be totally unloved. Mr Willis identifies the low turnover on this fund as a positive aspect, showing that the managers are “prepared to hold positions for several years in order for stock ideas to come to fruition”.
Rathbone Income
Mr Willis says this is a “traditional equity income fund” that is made up of between 50-70 companies, each providing above-average and increasing income. Manager Carl Stick (pictured) looks for those companies that have a management team committed to increasing dividends without sacrificing capital growth. Unlike Mr Woodford’s offering, this £484m fund tends to have a bias towards smaller companies.
