Should investors stick with Woodford’s forgotten Income Focus fund?

Investors that had their fingers burnt but stayed put in Woodford Income Focus are wondering whether to jump ship or if things are finally starting to look up.

While fallen star manager Neil Woodford’s flagship Equity Income fund hogged the headlines and was wound up, his lower profile Income Focus fund remained invested and got new managers. 

But one year on from its reopening what should investors in Woodford’s forgotten fund do? We take a look. 

Neil Woodford has long been a well-known investment name but for the best part of the last two years that has been for the wrong reasons after his flagship fund collapsed

It has been an uphill battle for Woodord Income Focus’s new managers Aberdeen Standard Investments, who took over the fund from Neil Woodford at the end of 2019, before overhauling and reopening it in February last year minus the tainted name.

Investors now hold a fund called ASI Income Focus, with 36 holdings and a 3.5 per cent yield and after a good clearout and rejig, some experts say it looks a reasonable prospect. 

Darius McDermott, of Chelsea Financial Services, said the fund is ‘definitely one to hold now’.  

ASI Income Focus top ten holdings (February 2021)
Company  % of portfolio 
BHP Group 6.4
OSB Group  5.3 
Close Brothers  5.3 
Inchcape  4.5 
Weir Group  4.0 
RELX  4.0 
John Laing Group  3.9 
Rio Tinto  3.9 
National Grid  3.6 
Mondi  3.3 
Source: Aberdeen Standard Investments

‘The fund has underperformed since the new managers took over but they had a lot to sort out and then Covid-19 happened and most equity income funds have struggled in that time,’ he said.

Woodford Income Focus top ten holdings (October 2019) 
Company  % of portfolio 
New River REIT 7.28
Barratt Developments  5.28 
Paypoint  4.41 
Provident Financial 4.33 
Taylor Wimpey  4.33 
Amigo Holdings  4.09 
Redde  4.06 
Crest Nicholson  3.83 
Imperial Brands  3.48 
Morses Club  3.30 
Source: Morningstar

‘The dividend has been cut, but it’s still a reasonable level all things considered. Personally I’d give the managers a bit more time. We rate them very highly and it is now in a good place.

‘It yields 3.5 per cent, so they are trying to meet the original objective of the fund and have a big focus on the dividend.’ 

Woodford’s Income Focus was set up to cash in on the manager’s astonishing early success with his own-name brand. In its early years, his main Woodford Equity Income fund raked in billions of pounds from investors and had decent performance.

Income Focus offered a similar style to the main fund but honed in on income for investors by backing dividend-paying shares.

Due to that, Income Focus investors were not hit as hard as hard as those in the now collapsed Woodford Equity Income fund, where the manager went off piste and started investing heavily in risky and illiquid early-stage and biotech companies.

Yet, many investors are still in the red as poor stock-picking even among steadier dividend-payers affected Income Focus during the saga that began when the flagship fund was frozen in summer 2019 and and continued into early 2020. 

While it has a long way to go before many investors will break even, the renamed ASI Income Focus fund has been on an upward trajectory over the 12 months to 11 March, returning 9.5 per cent, although that has been during the recovery from the Covid-19 crash.

But between 12 March 2019 and 11 March 2020, it crashed by 50 per cent. Since it was launched on 20 March 2017, it is down 35 per cent. 

My family has lost £4,000 

70-year-old Chris Pearce, from Bridgend, invested in the then Woodford Income Focus fund shortly after it launched in 2017 on behalf of himself, his wife and his 94-year-old father-in-law.

Between them they have suffered a loss of £4,000, with his father-in-law taking the biggest hit, down £2,500.

Chris invested through Hargreaves Lansdown and like so many others, was attracted by the platform’s promotion of Neil Woodford and his funds.

‘I’ve been using Hargreaves Lansdown for more than a decade and have never had a problem,’ he said. ‘They kept recommending Woodford’s funds and I invested because he’s been very good in the past.’ 

‘But we took a hit when everything happened and have realised it will take a long time before we get back to profit. 

Chris said he thinks moving the Income Focus fund to a different manager was a better option than closing it like the Woodford Equity Income fund.

He knows it’s been a tough journey for all involved, including the new managers and investors alike, but that he will stay and ‘see it through’.

He added: ‘I’ve lost a lot but as a long-time investor I’ve also made a lot. All you can do is grumble when things go wrong.

‘I am, however, confused that everyone is focusing on the liquidated fund even though investors in the Income Focus fund have also lost thousands.’

Commenting on Woodford’s ‘comeback’ which was announced last month, Chris said he understood why there was a lot of anger.

He said: ‘It’s not on when you’re sitting on big losses and [Woodford’s] continuing to take fees even while the fund is going under.

‘Now he’s saying he’s coming back while people are still struggling. Of course people are going to be angry. The trade bodies aren’t very reassuring either. Their silence is deafening.’

Jason Hollands, managing director at Tilney Investment Management Services, noted that ASI Income Focus featured prominently in Bestinvest’s Spot the Dog report last month.

He said: ‘Being down 35 per cent over the past three years made it the worst performing UK equity fund in the whole report. 

‘While much of the blame can be laid at the door of Neil Woodford, two other UK income funds managed by the new managers at Aberdeen Standard (ASI UK Income Unconstrained Equity and ASI UK High Income Equity), also made the dog fund list – which is hardly encouraging.’

Jason Hollands of Tilney says there may be better alternatives to Income Focus

Jason Hollands of Tilney says there may be better alternatives to Income Focus

Yet there is a possibility that conditions that have been holding the funds back, including Income Focus, have now changed and the future will favour them better.

The funds invest heavily in unloved UK firms with a value tilt, two things that the market has shunned but recently warmed to after the vaccine rally and Brexit deal.

Hollands said the funds have suffered by having relatively high exposure to domestic UK business (as opposed to global earners) and because the managers have focused on cheap shares during a period when markets have heavily rewarded growth companies on premium earnings.

‘There may be some light at the end of the tunnel, as since the breakthrough in coronavirus vaccinations last November, markets have started to reassess some of the areas hard hit last year in expectations of an economic rebound and so income funds, including those with a “value” bias have had a better run,’ he added. 

‘However as the chart below shows, the ASI Income Focus fund has performed in-line with the average fund in its sector since November, rather than shot the lights out.’

'The ASI Income Focus fund has performed in-line with the average fund in its sector since November, rather than shot the lights out,' says Tilney's Jason Hollands

‘The ASI Income Focus fund has performed in-line with the average fund in its sector since November, rather than shot the lights out,’ says Tilney’s Jason Hollands

What are the Income Focus alternatives?

Hollands thinks UK equity funds could have a ‘cracking year’ in 2021, as Brexit fears have faded, the market is relatively cheap and there is a high chance of a sharp recovery as the vaccination programme allows the economy to rebound. 

‘But I feel there are much higher conviction funds out there,’ he added. ‘In particular, if you’re not drawing income, then I like Fidelity Special Situations in the current environment. If you want income, then try Threadneedle UK Equity Income instead.’

I feel there are much higher conviction funds out there 

Jason Hollands, Tilney Investment Management Services

McDermott said interesting alternatives include the GAM UK Equity Income and Man GLG Income funds for investors looking for a similar value style. 

He recommends the Montanaro UK Income and TB Evenlode Income funds for those after more of a ‘quality’ portfolio. 

Meanwhile, Tom Poulter, head of quantitative research at Square Mile Research, said the AXA Framlington UK Equity Income, Majedie UK Income, Liontrust Income and M&G Dividend funds were the only four funds of 81 in the UK Equity Income sector to grow their income last year.

‘For 37 per cent of funds in the sector, their yield either stayed the same or grew,’ he said.

‘In the IA Sterling Corporate Bond sector, income growth was slightly better with 19 of the 85 funds (22.4 per cent) growing income in 2020. But only 7.3 per cent of funds grew their yield.

‘I would add the dividend cuts started coming through in March, so any fund that paid annual or semi annual dividends in January or February would have benefited.’  

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