How to get first dibs on Woodford’s 5% income fund

Retail investors should get a chance to apply for the new fund by mid March
Thursday 09 Feb 2017 Author: Daniel Coatsworth

Highly respected fund manager Neil Woodford is to launch a new income fund in March initially targeting a 5% dividend yield.

It will be called CF Woodford Income Focus and will only invest in companies that trade on a stock market.

HOW CAN I INVEST?

Investors will be able to apply for units in CF Woodford Income Focus through their stockbroker ahead of the official launch in a ‘fixed-price offer’. Further details will be announced in the coming weeks.

There is no guarantee that you will get a better deal by acting as soon as the offer period opens. Neither will it be a limited offer as the product will be classified as an open-ended fund.

Woodford Investment Management will use the money deposited in the offer period to set up the investment portfolio. The more money people invest, the more Woodford has to invest from day one in companies that meet the fund’s investment criteria.

It will accept additional money once the fund starts trading in March. Open-ended funds create and redeem units every day in response to investors’ respective buy and sell orders.

In comparison closed-ended funds like investment trusts only have a fixed number of shares in issue. High demand for shares in these types of funds can push up the price in excess of the value of its underlying assets.

Open-ended funds should continuously trade at the net asset value and not have their price affected by investor demand.

WHY WOULD I WANT TO INVEST?

Admittedly there are already a large number of income funds on the market. Do investors really need another one when the choice is already plentiful?

Neil Woodford is very well known and has made investors a lot of money in the past.

However, like most investors his track record isn’t always perfect. His investment trust Woodford Patient Capital Trust (WPCT) last year failed to achieve its goal of providing in excess of 10% annual capital growth.

Investors should not be too downbeat about that performance. The clue is in the name – Woodford Patient Capital Trust is a fund for ‘patient’ investors. It includes stakes in privately-owned companies that are still in the early stage of their corporate life and therefore not generating immediate value appreciation.

Woodford built his reputation as an income-focused fund manager with Invesco Perpetual, so one could assume he knows the qualities a company should possess in order to make a reliable income stock.

DOESN’T WOODFORD ALREADY HAVE AN INCOME FUND?

Yes, he does. The key difference between the new fund and his existing product CF Woodford Equity Income (GB00BLRZQ620) is that the latter is positioned towards capital growth and has less capacity to invest overseas.

CF Woodford Equity is targeting companies capable of paying some income and delivering a rising share price.

In contrast, it looks at first glance like CF Woodford Income Focus will target companies that potentially pay more generous dividends and which may deliver more limited growth in terms of share price appreciation.

The new fund will not be restricted by the geographies in which it can invest, providing a greater pool of opportunities than income funds which are purely focused on the UK market.

In comparison, CF Woodford Equity Income is only allowed to hold up to 20% of its assets overseas. At the moment it has about 85% invested in the UK. It is yielding 3.37% and has stakes in such companies as drug firm AstraZeneca (AZN) and cigarette manufacturer Imperial Brands (IMB).

IS THE NEW FUND GUARANTEED TO PAY 5% EVERY YEAR?

No. It doesn’t have a specific yield target beyond paying 5p in its first year. Even that amount is only a target and not a guaranteed payment.

All we know is that the new fund hopes to yield at least 20% more than the income delivered by the FTSE All-Share index over a rolling five-year period.

WHAT DO THE EXPERTS THINK?

‘The new fund from Woodford will look to complement the existing fund by focusing on a higher level of income with an attractive yield target of 5% at launch,’ says Ryan Hughes, head of fund selection at
AJ Bell.

‘With the demand for income an ever increasing trend, it is little surprise that the new Income Focus fund will look to tap into that need.

‘By specifically excluding unquoted stocks, the focus on income generation is clear while the flexibility to look overseas will also offer a much wider opportunity set should the UK economy falter in the face of potential headwinds from the forthcoming Brexit.’

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