After a downgrade by an influential rating agency, we give our view on Neil Woodford's flagship fund.
News that Morningstar have downgraded Woodford Equity Income Fund from bronze to neutral may rattle investors who have stayed loyal to the strategy and held tight in the hope of a turnaround.
But should it? Dzmitry Lipski, Investment Analyst, interactive investor thinks contrarian investors should be mindful that the fund today is very different to the fund it was three years ago, which has shaped the current performance:
"There's a well-known saying that there's no sense closing the barn door after the horse has bolted, and contrarian investors might want to bear this in mind.
"Three years ago was arguably the time to sell, when performance was at the top of its game and profit taking would have been a sensible strategy. TD Direct (now part of interactive investor) removed the fund from its recommended list three years ago, on my recommendation.
"At the time, I was uncomfortable with the structure of this fund, not least due to its unquoted holdings and biotech exposure - our analysis showed a strong correlation between the Woodford Equity Income Fund and Woodford Patient Capital Trust (LSE:WPCT).
"However, I was also mindful that if the fund were to be liquidated within a short period, the value of the fund would hold up reasonably well as 70% of the fund was very liquid – but another big risk factor was Woodford's reputation.
"Whilst Woodford's reputation may still be swinging on the hinge, the fund today is very different to where it was three years ago. The barn has had a thorough sweep, with unquoted stocks transferred to Woodford Patient Capital Trust, with a closed-ended structure much better suited to illiquid assets. This should help reduce risk and provide more clarity to investors.
"Whilst we still think there are better options, existing investors in Woodford Equity Income Fund could blend them with other high-quality funds in the sector to gain broader, more balanced exposure to UK equity income, including interactive investor Super 60 core fund Royal London UK Equity Income, and the low-cost Vanguard FTSE U.K. Eq Index. Either way, we don't think now is the time to panic."
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