Woodford could face income sector expulsion at end of 2013

Neil Woodford’s £13.7bn High Income fund is at risk of being expelled from the UK’s Investment Management Association UK Equity Income sector at the end of 2013 if its historic yield does not improve.

The Invesco Perpetual fund – the largest single asset offering in the UK – is lagging IMA requirements that UK equity income funds produce a yield of 110% of the FTSE All Share on a rolling three-year basis.

According to IMA data, the fund had a year-end yield of 3.9% in 2011, in line with 110% of the All Share. But last year the fund yielded 3.7%, below the required 3.9% mark.

That means the portfolio must yield 117% of the index at the end of 2013 in order to fulfil sector requirements.

As of the end of April 2013, High Income had a historic yield of 3.23%, according to Invesco Perpetual data.

According to Lipper, the All Share had a historic yield of 3.36% as of the same date and 117% of that figure translates into a yield of 3.93%.

In a statement, Invesco Perpetual’s UK product directors said they take the issue seriously, but added Woodford will not seek to boost High Income’s yield just to remain in the sector.

“We would be reluctant to sacrifice capital to boost income purely for the sake of maintaining sector status. To do so may not be in the best interests of our investors.

“We do believe, however, our investment approach with its focus on valuation and fundamental analysis should deliver a superior long-term income to that of the market, as an important part of an attractive long-term total return.”

High Income, which remains a top performer in the UK equity income sector over three and five years, appears to some extent to be a victim of its reporting period dates.

Woodford’s separate £10.3bn Income portfolio, for instance, is not at risk of sector ejection because its own year-end date of 31 March differs to that of the High Income fund.

The Income fund’s yield compared favourably to the All Share in the year to 31 March 2011 and was in line with requirements in the year to Q1 2012.

Last December Investment Week highlighted a number of other income funds were facing possible ejection from the sector as the IMA’s new rolling three-year requirements came into force.

The £1.3bn St James’s Place Equity Income trust was subsequently kicked out in February 2013.

Similar to Invesco Perpetual, St James’s Place said at the time it was comfortable focusing on long-term performance rather than chasing yield.

Meanwhile James Henderson, whose £361m UK Equity Income fund is also facing expulsion from the sector later this year, told Investment Week in February IMA rules should reflect the fact dividend growth over time is “far more important” than absolute yield.

The IMA introduced its three-year requirements in 2010, following complaints from association members that too many funds were focusing on growth-orientated stocks at the expense of headline yield.


This article was first published on Investment Week

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