Should income seekers buy into Neil Woodford’s new fund?

Paul Summers looks at the arguments for and against investing in the star fund manager’s new offering.

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When one of the UK’s most successful and revered money managers reveals he’s launching a fund focused on generating income, it’s understandable if many private investors sit up and take notice. Given this, let’s look at the arguments for and against allocating some of your capital to Neil Woodford’s new Income Focus fund when it comes to the market next month.

Reasons to buy

Over the long term, it’s hard to criticise Woodford’s performance. After all, £1,000 deposited into his Invesco Perpetual High Income fund back in 1988 grew to over £26,000 by the time he left the company in 2014. Since very few managers are able to generate market-beating returns on a consistent basis, that’s got to count for something.

For those who depend on their investments to get by, the 5% yield targeted by the new fund is also undeniably tempting, particularly at a time when the best easy-access cash ISA offers a paltry 1.01%.

Third, Income Focus could have appeal for those concerned by Brexit. The new fund’s international reach — and subsequent geographical diversification — should give holders a greater degree of protection if and when Article 50 is triggered.

In contrast to closed-ended vehicles like investment trusts, the open-ended nature of this new venture also means there won’t be a limit to the number of shares that can be issued. As such, Income Focus should continuously trade at the value of its underlying assets, irrespective of investor demand. In other words, you won’t be paying an inflated price for its constituents.

Reasons to stay away

Now for the arguments against. First, the 5% yield is only a target. If the fund’s units increase in value before the payout date, the yield will fall. Moreover, Woodford’s aim of beating the yield offered by the FTSE All-Share index by 20% over five years can always be revised down and explained away.

Second, Woodford’s enviable track record doesn’t disguise the fact that he’s also selected a few stinkers in his time, his large holding in Capita being an example. Shares in the outsourcer fell to a 10-year low in December after issuing two profit warnings in three months. Even the best make mistakes.  

On a related note, Woodford’s Patient Capital Trust — which invests in a large number of early-stage companies — has so far failed to live up to its promise of delivering a 10% return per year. Shares currently exchange hands for just over 92p, almost 8% less than their price at launch. Although focused on long-term returns, it can’t be easy for holders to see their capital lose value.

Third, in contrast to his Equity Income Fund, Income Focus looks like it will be less concerned with capital gains and rising dividends. This may put off some investors who view the latter as preferable (and indicative of a company in rude health) to large but stagnant and possibly unachievable yields.

Finally, as highlighted here, private investors shouldn’t forget the advantages they have over highly-paid fund managers. Unless you have neither the time nor the inclination to follow the market, the act of delegating responsibility for growing your wealth to someone else shouldn’t be taken lightly. Even if you don’t end up matching their performance, a lack of management fees could still mean that you generate a better overall return.

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.

Paul Summers 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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