Woodford Income Focus versus Equity Income: What's the difference?

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Woodford Income Focus versus Equity Income: What's the difference?

We were warned there would be some overlap when Neil Woodford announced his new fund back in February. But now the star manager has finally made public his list of holdings, we were surprised just how similar his new £553 million Income Focus fund is to the established Equity Income.

Woodford said three months ago that his new fund for income-hungry investors would target a yield of 5%. At the press conference launch, he said he'd run a dummy portfolio that had around 15 to 20 stocks that were also in his Equity Income fund.

However, we counted 32 when the full Income Focus portfolio was announced Wednesday – that's almost two-thirds of the fund. Clearly, the weightings to each holding differ – fairly substantially in some cases – but the top four are the same: AstraZeneca (AZN), Imperial Brands (IMB), Provident Financial (PFG) and Legal & General (LGEN).

Other similarities include Lloyds Banking Group (LLOY), which he recently bought into, alongside other new additions to his armoury in housebuilders Barratt (BDEV) Developments and Taylor Wimpey (TW.); student accommodation developer Watkin Jones (WJG); and real estate firms British Land (BLND), Hansteen (HSTN), Londonmetric (LMP) and Sirius Real Estate (SRE).

Here's what Woodford Income Focus's top 10 holdings look like:

Woodford Income Focus: Top 10 holdings   
Rank Company Weighting (%) Yield (%)**
1 AstraZeneca* 7.39 4.3
2 Legal & General* 6.59 6.1
3 Imperial Brands* 4.93 4.6
4 Provident Financial* 4.54 4.6
5 AbbVie* 3.58 3.9
6 Lloyds Banking Group* 2.66 6.0
7 Taylor Wimpey* 2.52 6.9
8 SSE 2.52 6.3
9 Barratt Developments* 2.50 6.6
10 ICG 2.48 2.6
* Also held in Woodford Equity Income      
** Source: SharePad/Trustnet      

"In the run up to the launch of the Income Focus Fund I had said that I believed there was an attractive domestic opportunity, in part because people were too downbeat about the UK economy," Woodford explained this week.

"The new portfolio is a manifestation of this view but in a more income-focused way.

"The bearish mood has resulted in very big share price falls in some domestic cyclical sectors and it is this opportunity set that I see in the stock market right here, right now. I have been taking advantage of some of the depressed valuations in domestic cyclicals.

"There are also some familiar names in the portfolio, which is in great shape and I am extremely confident it will deliver the income target we set when we launched the fund in March."

Spot the difference

The Equity Income fund yields less than 3%, so there are 18 new holdings in the Income Focus fund, which Woodford will hope help get that payout to 5%. Here are some of the more notable ones.

Aviva

Since losing half its value in the space of 16 months, Aviva (AV.) has been slowly rebuilding since the vote to leave the European Union in June. The insurer's share price is up almost 8% year-to-date and broker Panmure Gordon tips them to do more, up to 592p, implying 14% upside.

Last week's sale of its 50% shareholding in two Spanish life and pension joint ventures as well as its retail life business for over £400 million represents 12 times 2016 earnings, analyst Barry Cornes said.

This compares to Aviva's price/earnings (PE) ratio of 10.5 for 2016, dropping to 9.9 next year. "We therefore believe that the disposal is attractive as well as helping to reduce the diversity of the group, which we believe has had a negative impact on the investment case in the past," he added.

Add to this a forecast dividend yield of 4.6% for 2017 and the stock should provide the goods for Woodford.

IAG

British Airways owner International Consolidated Airlines (IAG) is another new entrant. It yields a modest 3.4%, according to Panmure, but it's also on a winning run, having grown in value by a third this year. Others in the City think that yield will race past 4% next year.

IAG shares hit a 17-month high after "solid" first-quarter numbers a fortnight ago, having made "encouraging progress" on unit revenue. It has strong market positions, says Panmure's Mark Irvine-Fortescue, so "probably merits core holding status in this space".

A PE of 7.3 is "hardly demanding," but the broker reckons "durable cost-led margin expansion is needed for a meaningful re-rating" and keeps his 'hold' recommendation and £5 target price.

Morses Club

Morses (MCL) is a company we've covered recently when we noticed a bullish broker note following full-year results last month. Jeremy Grime, finnCap's highly-regarded financials analyst, suggested the doorstep lender could be worth 50% more.

The company is the second biggest home credit collector in the UK, behind fellow Woodford favourite Provident. While shares have slipped in the three weeks since we covered them, the AIM-listed firm has some big backers, including well-known investor George Soros.

It's up 20% since floating just over a year ago and currently yields over 5.3%. That's more like it.

SSE

SSE (SSE) is not an unfamiliar name to Woodford. He had a long association with the utility going back to his days managing at Invesco Perpetual's Income and High Income funds.

When he transferred the holdings in those portfolios to his first eponymous offering, SSE came with him. However, he sold just over a year later, citing worries around its focus on shareholder returns.

Seems he's forgiven them. Its target of increasing the dividend "at least equal to RPI inflation" over three years to 2020 should provide a source of growing income over the life of Woodford's fund. It increased dividend per share by 2.1% at full-year results Wednesday, and offers a prospective yield of 6.3%. Cracking.

Other notable new entrants to Woodford's stable were housebuilders Bovis Homes (BVS) (yields 5%) and Crest Nicholson (CRST) (around 6%); over-50s product provider Saga (SAGA) (4%); tile retailer Topps Tiles (TPT) (nudging 4%); and German property company LEG Immobilien.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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Fund Data
Name1 Year (%)3 Years (%)5 Years (%)Rating
--- star(s)
LF Woodford Eqty Inc-10.91-0.27-1 star(s)

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