The woes that have befallen Neil Woodford in 2017 are likely to see his flagship £8bn Woodford Equity Income fund kicked out of the IA UK Equity Income sector at the end of the year.
The fund has lost 0.32 per cent in the year to 20 December, ranking it the absolute worst out of 85 funds in the IA UK Equity Income sector over the year. The sector has gained 11 per cent over the year.
In order to be eligible for membership of the IA UK Equity Income sector, a fund must achieve a dividend yield of either 90 per cent of that of the FTSE All Share in one year, or match the yield over a three year period.
The expectation from Woodford Investment Management is that the yield target is very unlikely to be met for the 2017 calendar year, and hasn’t been hit in either of the two previous years, meaning the fund is likely to be removed from the sector.
If that happens, it would become part of the IA UK All Companies sector.
This has already happened to the Invesco Perpetual Income and High Income funds, the mandates run by Neil Woodford at Invesco Perpetual before he left that company to strike out on his own.
The £1.3bn Evenlode Income fund was the top performer in the sector when it was removed for not hitting the yield target in 2016.
The target when those funds were removed was to achieve 10 per cent more than the yield of the FTSE All Share.
The IA subsequently reduced the hurdle to remain in the equity income sector to 100 per cent of the yield.
Mr Woodford has said he regards himself as a total return investor, rather than an income investor.
He said if he had, throughout his career, pursued a purely income strategy, he could have achieved a higher yield but with a much lower total return.
Mr Woodford said he thinks his investors would prefer him to have pursued the absolute return strategy over the years, as the returns have been higher.
Mark Dampier, the head of research at Hargreaves Lansdown said Mr Woodford runs the fund as a “barbell strategy”. This means he tends to have two very different types of stocks in the fund.
The first kind is the typical dividend payers, the second, the more early stage companies that do not pay dividends.
This means, according to Mr Dampier, that Mr Woodford’s portfolios rely on a relatively small number of stocks to generate the income, relative to other equity income managers, who might only buy shares that pay a dividend.
During 2017, the fund manager has seen stark reversals from some of the largest investments in the fund, including those of FTSE 100 lender Provident Financial.
The shares of this company have fallen from £27.70 to £8.50 over the past year. Mr Woodford continues to defend the investment case for these shares.
Mr Dampier said he continues to back Mr Woodford.
Of the likelihood of his fund being demoted from the IA Equity Income sector, Mr Woodford said: "The important point is that we target the distribution and the growth in the distribution.
"What I have said in the past, is that we would grow the distribution by low to mid-single digits - indeed, the outcome for this year actually might be a bit better that that.
"Going forward, I’m confident that we will be generating a very healthy level of income because the income producing part of the portfolio is in some very high-yielding shares which, as I’ve said, are massively out of favour at the moment and where both dividend yield and dividend growth are going to be very strong.”
David.Thorpe@ft.com
