Two reasons I’m still avoiding Neil Woodford’s Equity Income fund

Edward Sheldon takes a closer look at the portfolio and performance figures of Neil Woodford’s Equity Income fund.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Early last year, I made the decision to sell my holding in Neil Woodford’s Equity Income fund after having held the fund for a little over three years. As I explained in this article, one of the main reasons I sold the fund – aside from its poor performance – was its composition. To my mind, it didn’t really resemble an equity income fund, as it held a large number of non-dividend-paying stocks.

Would I invest in it today? Looking at the portfolio and its performance, no I wouldn’t. Here’s a look at why I’m still avoiding this one.

Poor performance

Woodford’s Equity Income fund continues to underperform badly. The performance figures really are quite shocking. 

For example, according to Hargreaves Lansdown, over the last year, the fund is down around 6.6%. In contrast, the FTSE All-Share index is up 7.2%. My decision to sell a little over the year ago looks to have already paid off.

Yet what’s even more worrying is the performance over three years. Over this time horizon, Woodford’s fund is down around 7.8%. By contrast, the FTSE All-Share is up around 32.8% while a number of other funds have done even better. For example, Nick Train’s UK equity fund is up 47% over the last three years. That’s a significant underperformance from Woodford.

To put this poor performance in perspective, out of the 247 funds in the Investment Association’s ‘UK Equities’ fund segment, the Woodford one was ranked 246 out of 247th for performance over the last three years. With that kind of ranking, it’s no wonder that investors are pulling their money out of the vehicle in droves.

Fund composition

Aside from the performance of the fund, I’m still put off by the composition of the portfolio.

Last year, I noted that it contained very few blue-chip dividend stocks. Yet today, it holds even less of them. The only stock in the portfolio right now that I would classify as a blue-chip is tobacco manufacturer Imperial Brands.

Many other stocks in the portfolio are early-stage companies that are either not yet profitable or don’t pay dividends. For example, there’s Purplebricks, whose share price is down 60% in the last year. As my colleague Rupert Hargreaves pointed out recently, this is a company that may not be profitable for years, if ever. Then there are unquoted private companies such as Benevolent AI, Industrial Heat and Ombu. What these kinds of stocks are doing in an Equity Income fund I am really not sure.

Additionally, the fund has a large exposure to UK housebuilders which I think is a risky move. I would not want to be holding these stocks if Brexit resulted in a recession. Just remember what happened to the housebuilders in the Global Financial Crisis.

Source: Woodford Investment Management 

While Woodford’s investment strategy could turn out to be validated in the years ahead, in my view, the portfolio looks quite risky at present. Ultimately, it’s not what I’m looking for in an equity income fund. So for now, I’ll be continuing to avoid it.

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 owns shares in Imperial Brands. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black father holding daughter in a field of cows
Investing Articles

A FTSE 100 share that could create generational wealth

Investing in FTSE shares can help individuals pass down a significant chunk of cash to their children and grandchildren, data…

Read more »

Investing Articles

Here’s what the BT share price could mean for passive income investors

The BT share price has been falling for years, but that might be about to change. And dividends could be…

Read more »

Investing Articles

At £4.76, is the Aviva share price a steal? Here’s what the charts say!

Aviva has outperformed the Footsie over the last year. But is there still value in its share price? This Fool…

Read more »

Photo of a man going through financial problems
Investing Articles

Does a 43% price drop make this undervalued UK stalwart one of the best cheap shares to buy now?

After losing a third of its value of the past five years, this might be one of the most undervalued…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

My top 3 picks today for a £20,000 Stocks and Shares ISA

Here are three very different investments to consider for a Stocks and Shares ISA, covering both the UK and US…

Read more »

Businesswoman calculating finances in an office
Investing Articles

The Darktrace share price has been surging — and it could climb higher

I think the Darktrace share price could have more room to run. Despite the competitive AI industry, the firm looks…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

With its 7% dividend, should I be watching the Aviva share price?

Dividend investors will struggle to find many companies with a yield above 7%, so should the Aviva share price be…

Read more »

Investing Articles

Could this be one of the FTSE 100’s best cheap dividend shares?

Looking for the best dividend growth shares to buy? Our writer Royston Wild thinks this FTSE 100 housebuilder might well…

Read more »