Best in Class: Woodford three years on

Best in Class: Woodford three years on

Three years ago, the much-anticipated CF Woodford Equity Income fund was launched.

After a quarter century-long and very successful career at Invesco Perpetual, this was Neil Woodford’s first foray into the world of boutique fund management and the question on everyone’s lips was: should investors go with him or should they stay put?

With £1.6bn invested in the fund in the fixed offer period, it is safe to say many investors followed him and those who did have been rewarded.

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At the time of writing, it is the number one fund in the IA UK Equity Income sector since its launch, beating 77 other funds, with returns of almost 38 per cent. This compares with a sector average of 25.3 per cent and an index return of 24.4 per cent.

Its assets under management today have swelled to more than £10bn. It epitomises Best in Class.

It has not all been plain sailing though. While Neil had a great start in the first 12 months or so, 2016 was a frustrating year for the fund. Neil’s underweight positions in banking and oil and gas sectors hurt his performance when these sectors bounced back in a mini value rally.

There were also a couple of individual stock issues in the ‘early-stage business’ portion of the fund. Industrial Heat, a tech company he backed, was hit by a $89m (£69m) lawsuit from a scientist who claimed he was owed the money for the use of his invention. Northwest Biotherapeutics, another holding, was also subjected to allegations of financial impropriety. This led to questions earlier this year as to whether Neil had lost his touch.

I have continued to back him. He will always under-perform when cyclical stocks are in favour, but he has always come good over the longer term and I see no reason for this to change.

He manages the fund according to the same investment philosophy that saw his Invesco Perpetual funds rise to the top of the 10-year rankings. His astute understanding of the macroeconomic environment and preference for companies with transparent earnings, balance sheet strength and attractive valuations have seen him avoid many pitfalls that have beset other UK equity managers.

Today, Neil is more positive on the outlook for UK equities than for some time. He believes that, post-Brexit voting, investors have been too pessimistic and recent portfolio changes reflect this.

A short three-month holding in HSBC aside, his recent investment into Lloyds is his first in the banking sector for a decade or more. He believes the rehabilitation period for UK banking is almost complete and the pick-up in lending activity and valuations make them more attractive than they have been in years.

Lloyds’ conservative approach to its balance sheet and ability to pay a dividend, and a growing one, make it a good choice in his eyes.