Income Focus Fund update, December 2017

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Mitchell Fraser-Jones 19 January 2018 Est. reading: 3 min read

The UK stock market finished the year strongly, following much the same pattern as for 2017 as a whole, with a narrow set of stocks, perceived as beneficiaries of accelerating global growth leading the index higher. Among the winners in the market’s popularity contest currently, are oil majors Royal Dutch Shell and BP, commodity businesses Rio Tinto and Glencore, and HSBC.

The sustained momentum of these index heavyweights has further exacerbated the gap between market valuations and the fundamentals that sit beneath them. It also led to a continuation of the challenging performance backdrop for the fund, which delivered a decent positive return but struggled to keep pace with the overall market.

Core holdings in Legal & General, Imperial Brands, Astra Zeneca and Lloyds, which together make up more than a fifth of the portfolio, all performed well in December. Legal’s announced the sale of its Mature Savings business (a mix of old products including with-profits and insurance based pensions which have largely been closed to new business for some time), with the proceeds to be retained to accelerate growth across its key businesses. It also confirmed it was on track to deliver a record year for earnings and profits.

Meanwhile, some of the portfolio’s more domestically-exposed businesses also delivered a positive contribution to returns, perhaps buoyed by the positive progress delivered in the Brexit talks. Shares in housebuilders Barratt Developments, Crest Nicholson and Taylor Wimpey, property companies British Land and NewRiver Retail and automotive-related businesses Redde and AA, for example, all benefited from a more favourable environment than of late, but in our view, remain at very depressed valuation levels.

At the other end of the spectrum, Capita performed poorly, following the release of its interim results. Although the results were broadly in line with expectations, there were a number of complicating one-off elements and a mixed outlook statement, which came at a time when investors are keen to see clearer evidence of recovery. The shares declined by 12% on the day of the results which looks very harsh to us in the context of Capita’s already low valuation. The shares yield over 7% here which suggests that some investors fear a dividend cut may be required. With a new chief executive now in place, clearly that eventuality cannot be completely ruled out, but having met Jon Lewis during the month, we are reassured that decisions around capital structure and the dividend will be informed by a clearer long-term strategy for the business, something we expect to hear more about later this year. In the meantime, we have maintained the portfolio’s exposure to this business, seeing the potential for significant value creation in the future as Capita is restored to the high quality, successful and well-run business that it used to be.

Saga’s shares were also weak following a surprise trading update in which it lowered earnings expectations due to a more challenging trading environment in insurance broking and disruption from the Monarch Airlines administration. These headwinds and the requirement for additional investment to drive growth, contributed to a 30% fall in the share price. Although this is clearly a disappointment, we believe it is yet another over-reaction by the market and that the shares still offer attractive value, with a yield of around 7% well covered by free cash flow. We are satisfied that this dividend is safe, but it is now less likely to grow than we had previously expected.

In terms of portfolio activity, we continued to build on our strategy, increasing positions in a number of UK domestically-exposed companies, including Regional REIT, Capita and Bovis Homes.

Turning to the investment outlook, there are many reasons to be positive heading into 2018. We anticipate a very different investment environment to prevail in the year ahead, as macroeconomic conditions increasingly challenge the view of the world that is reflected in financial market valuations. As the year progresses, there will be many events and data points which provide evidence of the changing investment landscape. We will, of course, keep you informed of our progress as the year unfolds and we remain very confident of delivering very attractive returns against the backdrop of much more challenging market conditions more broadly.

LF Woodford Income Focus Fund
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What are the risks?

  • The value of the fund and any 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 ongoing charges figure 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 – some of these security types could increase the fund′s volatility and increase the level of indirect charges to which the fund is exposed
  • The fund may invest in overseas securities and be exposed to currencies other than pound sterling – as a result, exchange rate movements may cause the sterling value of investments to decrease or increase

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: 27 Old Gloucester Street, London, WC1N 3AX.

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