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LF Woodford Income Focus Fund

Many investors have asked, with the UK stock market close to all-time highs, whether now is a good time to be launching the LF Woodford Income Focus Fund? For a variety of reasons, which you can explore below, the answer is, emphatically, yes!

“I never thought I would again see the day when you could get a 5% yield* from a high-quality income portfolio, especially with interest rates so low”

Neil Woodford

* Based on a launch price of 100p. Investors should be aware that the fund will not target a specific yield and there is no guarantee that any specific level of yield or income will be achieved over any given time period.

The power of compounding

The eighth wonder of the world

The importance of dividends to total return is profound. Over nine decades, capital invested in the UK stock market has appreciated at a compound annual growth rate of 5.4% – this is an attractive growth rate in itself but, with dividends reinvested, the total return from UK equities compounds at an annual growth rate of 10.4%. This is a product of what Einstein observed to be the eighth wonder of the word – compound interest!

Reinvested dividends provide a powerful boost to long-term equity total returns

With dividends reinvested, £1,000 in 1926 would have grown to £7.8m by 2017

Source: Morgan Stanley, Woodford. Past performance cannot be relied upon as a guide to future performance.

Read more on the importance of dividends

Attractive income

The ‘go-to’ asset class

UK equities look exceptionally attractive from the perspective of income.

For most of modern history, cash and bonds have been the primary domain of income investors because of the attractive yields they were able to offer. Equities, meanwhile, have tended to have a much lower yield but, in recent years, all of that has been turned on its head. The equity market has become, in our view, the go-to asset class for income investors.

Yield from primary UK asset classes over time (%)

Source: Morgan Stanley

The chart shows the yields from UK equities, Gilts and cash since the 1930s. The yield on UK equities has moved from being well below that of Gilts and cash for most of the last 50 years, to being substantially higher in recent years, as a result of the continued decline in interest rates.

Attractive return prospects

We believe the UK stock market is poised to deliver attractive long-term returns from here. There is a very strong relationship between starting valuation and subsequent returns. The current valuation of the UK stock market implies that attractive returns can be delivered over the next 10 years, based on the historic trend.

UK equities: starting valuation has a strong influence on long-term returns

Source: The Lazarus Partnership, Woodford, based on FTSE All Share (excluding investment trusts) total return data in UK sterling, adjusted for CPI inflation

Genuine active management adds further value

It is, of course, as essential as ever to be selective. The broad market valuation is always an average of cheap and expensive stocks, so truly active fund managers, such as ourselves, can add substantial long-term value. Our investment approach aims to avoid the overvalued stocks (and there are plenty of them around!) and focus the portfolios towards the most attractive investment opportunities, wherever we find them.

“This is where judgement comes into my investment process – I have to make judgements about the sustainability of a company’s dividend which may be at odds with what a management team is saying.”

Neil Woodford

Find out more about the UK stock market’s return prospects…

Time in the market

UK equities have delivered a better long-term return than other asset classes but it has come at the expense of greater volatility. Is it right to think of risk in terms of volatility though? The fund management industry has certainly done so over the years, but we would argue that there is a compelling alternative. As long-term investors, we define risk in absolute terms – as the potential for a permanent loss of capital.

The data below demonstrates that the longer an investor can leave his or her capital invested in the stock market, the lower the risk of a permanent loss of capital becomes. At the same time, the potential for attractive positive returns improves considerably.

Why time matters in the stock market

Probability of loss Historic performance range (based on £10,000 starting investment) Best performance Average performance Worst performance Historic outcomes (£10,000 base) Best Average Worst Probability of loss Historic outcomes (£10,000 base) Best Average Worst
1 day 1 week 1 month 1 quarter 1 year 3 years 5 years 10 years

Source: Morningstar Direct using total return data from 31.12.85 to 31.12.16.

Please note: Probability of loss and historic performance ranges for other markets, individual securities or funds will be different. Past performance cannot be relied upon as a guide to future performance.

Why time matters in the stock market

Historic performance range (based on £10,000 starting investment)
Time period Probability of loss Best performance Average performance Worst performance
1 day 44.6% £10,921 £10,004 £8,891
1 week 43.1% £11,292 £10,020 £7,817
1 month 37.1% £11,396 £10,087 £7,354
1 quarter 31.1% £12,238 £10,261 £7,003
1 year 23.6% £16,265 £11,073 £6,564
3 years 17.5% £20,294 £13,327 £6,065
5 years 11.5% £25,522 £15,931 £7,116
10 years 1.2% £48,095 £24,438 £9,342

Source: Morningstar Direct using total return data from 31.12.85 to 31.12.16.

Please note: Probability of loss and historic performance ranges for other markets, individual securities or funds will be different. Past performance cannot be relied upon as a guide to future performance.

Find out more about one of the very few enduring relationships in the investment world…

An extraordinary opportunity

“The dividend has always been important to me as an investor and it always will be. The dividend isn’t ordinary – if anything it is extraordinary. And by selecting the most attractive and most sustainable dividends, I aim to deliver extraordinary long-term returns to investors.”

Neil Woodford

Whether an investor is looking for income, growth or a mixture of the two, we believe the new LF Woodford Income Focus Fund is a very attractive investment proposition.

What are the risks?

  • The value of the fund and the income from it may go down as well as up, so you may get back less than you invested
  • Past performance cannot be relied upon as a guide to future performance
  • The annual management charge is charged to capital, so the income of the fund may be higher but capital growth may be restricted or capital may be eroded
  • The fund will be invested in a concentrated portfolio of securities – the fund is not restricted by reference to any geographical region, sector or market capitalisation
  • The fund may invest in other transferable securities, money market instruments, warrants, collective investment schemes and deposits
  • The fund may invest in overseas securities and be exposed to currencies other than pound sterling

Important information

Before investing, you should read the Key Investor Information Document (KIID) for the fund, and the Prospectus which, along with our terms and conditions, can be obtained from the downloads page or from our registered office. If you have a financial adviser, you should seek their advice before investing. Woodford Investment Management Ltd is not authorised to provide investment advice.

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

The Woodford Funds (Ireland) ICAV (the “Fund”) has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland. The Fund’s Swiss paying agent is Neue Helvetische Bank AG. All fund documentation including, Prospectus, Key Investor Information Documents, Instrument of Incorporation and financial reports may be obtained free of charge from the Swiss Representative in Lausanne. The place of performance and jurisdiction for all shares distributed in or from Switzerland is at the registered office of the Swiss Representative. Fund prices can be found at www.fundinfo.com.

© 2018 Woodford Investment Management Ltd.
All rights reserved.

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