Neil Woodford's flagship £6.6bn Equity Income fund has been kicked out of the IA UK Equity Income sector.
Woodford Investment Management confirmed today (Thursday) the fund will move into the IA UK All Companies sector.
To be eligible for inclusion in the UK Equity Income sector, a fund must deliver a higher income than the FTSE All Share index over rolling three year periods. Woodford Equity Income has not done this, and so is changing sectors.
This comes after the fund lost 0.32 per cent in the year to 20 December, ranking it the worst out of 85 funds in the IA UK Equity Income sector, which gained 11 per cent over the year.
Laith Khalaf, senior analyst for Hargreaves Lansdown, said: "Woodford Equity Income is set to join a number of funds which have fallen out of the UK Equity Income sector in the last few years.
"This isn’t a reflection of any change in the fund or its prospects, rather it’s a function of the particular strategy of Woodford Equity Income and the sector rules on yield.
"This fund places an emphasis on long term total returns, and so Neil Woodford is willing to give up some income now in return for longer term growth prospects. Consequently, over the last few years the fund has yielded on average a little less than the UK stock market, which means it’s no longer eligible for inclusion in the UK Equity Income sector.
"Fund sectors should only be seen as a rough guide to what a fund does and are no shortcut for looking under the bonnet to get an idea of how the manager goes about his business. Importantly the change of sector has no bearing on how Neil Woodford runs the portfolio."
The fund follows in the footsteps of others that have fallen out of the UK Equity Income sector to become a part of the 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.
Meanwhile 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.
When those funds were removed the target was to achieve 10 per cent more than the yield of the FTSE All Share.
In a statement, Woodford Investment Management said: "Throughout his 30-year investment career, Neil has focused on delivering positive long-term total returns through a combination of income and capital growth for his flagship equity income funds.
"He believes this strategy is in the best interests of his investors and he has never been willing to sacrifice capital to supplement income in the short-term and his portfolio construction isn’t dictated by yield considerations.
"During the recent IA consultation on the UK Equity Income sector, we recommended removing the headline yield target as it does not effectively capture the impact of dividend growth over the long term.
"Neil's focus for the LF Woodford Equity Income Fund has been, and always will be, on delivering a particular level of income per share, rather than a specific yield. From the outset, Neil said he would aim to deliver 4p based on the launch price of £1 and grow that income each year. That commitment remains.
"However, we recognise that managing the equity income fund in this way is always likely to be challenged by the parameters set by the IA for its equity income sector and subsequently we are comfortable that the fund will now sit in the UK All Companies sector."
