Don’t invest in Neil Woodford’s Equity Income Fund until you’ve read this

Is Neil Woodford’s Equity Income fund really what it says it is?

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Fund manager Neil Woodford has an excellent reputation, and a phenomenal track record of generating wealth for his investors. Indeed, if you had invested £10,000 with Woodford when he started out in 1989, your portfolio would now be worth over £300,000, twice the amount had the capital been invested in the FTSE All-Share index. So it’s no surprise that Woodford’s Equity Income fund consistently ranks among the most popular investment funds in the UK.

However if you’ve been thinking about investing hard-earned capital in Woodford’s fund, there’s a few things you should understand first.

Equity income

Equity income funds can provide an excellent foundation to many investment portfolios, as they aim to generate a rising income along with some capital growth over the long term. The fund manager will generally look to invest in mature, well-established businesses that pay regular dividends to shareholders. While the investment universe is diverse, it’s common to see blue-chip companies in the financials, healthcare, oil & gas, and consumer goods sectors making up a significant proportion of fund holdings.

A glance across the equity income fund sector reveals that many funds look quite similar, sharing key holdings. That’s why I was surprised recently when I examined Neil Woodford’s portfolio holdings. It’s fair to say that Woodford’s Equity Income fund isn’t your average equity income fund.

Actively managed

The first thing investors should understand about Woodford’s fund is that it’s very much ‘actively managed’. This means the fund manager isn’t simply aiming to replicate the returns of the market, but instead add value by picking his own stocks. Woodford isn’t afraid to make bold investment decisions, and as a result, the fund may not behave like the market at times. 

Under the bonnet

The next thing to be aware of is the composition of the portfolio. Woodford is transparent about his portfolio holdings and the full list of holdings as of 31 December 2016 can be found here. I’d recommend taking a look, because when I peered under the bonnet recently, I was quite surprised by some of the holdings. 

As can be seen below, the top 10 holdings are fairly standard for an equity income fund with a focus on FTSE 100 dividend champions, although there are a few unorthodox names in Prothena, Allied Minds, and Theravance Biopharma 

Woodford Holdings 1-10

1

AstraZeneca

8.12%

2

GlaxoSmithKline

7.81%

3

Imperial Brands

7.33%

4

British American Tobacco

6.24%

5

Legal & General

5.48%

6

Provident Financial

5.08%

7

AbbVie

3.31%

8

Prothena

2.86%

9

Allied Minds

2.27%

10

Theravance Biopharma

2.25%

Source: Woodfordfunds.com

However, looking beyond the top 10 holdings, Woodford really starts to shake things up, with less focus on well-known mainstream companies. 

Woodford Holdings 11-20

11

Benevolent AI (unquoted)

2.21%

12

Capita

2.20%

13

Babcock International

1.98%

14

NewRiver REIT

1.69%

15

Lancashire

1.66%

16

Alkermes

1.59%

17

BCA Marketplace

1.36%

18

Burford Capital

1.36%

19

G4S

1.36%

20

Next

1.32%

Source: Woodfordfunds.com

And by the time we get to the bottom of the portfolio, many of the companies he has invested in are unheard of and in fact, unquoted. 

Woodford Holdings 110-119

110

e-Therapeutics

0.03%

111

Genomics (unquoted)

0.03%

112

Halosource Reg S

0.03%

113

Synairgen

0.03%

114

Viamet (unquoted)

0.03%

115

Emba (unquoted)

0.02%

116

Evofem (unquoted)

0.02%

117

Emba – Series 2 (unquoted)

0.01%

118

Evofem C (unquoted)

0.01%

119

Sphere Medical

0.01%

Source: Woodfordfunds.com 

Healthcare bias

It’s also worth noting the strong bias towards the healthcare sector and Woodford has made it clear that he’s bullish on the long-term prospects of this sector. However, while he’s got large positions in the big boys of the pharma world, I’m quite surprised by just how many smaller, unproven healthcare holdings are in the portfolio, many of which aren’t even listed.

So what does this all mean? Has Woodford lost his focus? Do his poor performance figures over the last 12 months mean it’s time to ditch the fund manager? In my opinion, the answer to these questions is no, given his long-term track record. Having said that, I believe it’s important that investors understand exactly what they’re investing in before they invest in Woodford’s Equity Income fund.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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