Research from the factor analysis house found star manager Neil Woodford (pictured) significantly reduced his mega cap stock exposure from 44% in April 2016 to 0% by August 2018. It stayed at this level until the fund’s suspension earlier this month.
Mega caps, which are defined in this case as the top 40% of the UK market, are more liquid than smaller companies and tend to offer better dividends, something in line with an Equity Income fund manager’s mandate.
The fund’s exposure to mega caps began to dramatically fall in mid-2017, dropping to just over 20% in March and then declining further to around 12% by the year end. The typical UK Income fund holds around 31% in mega caps during this period.
The report said: “Anyone monitoring this fund should have been questioning this change from mid-2017.”
The fund’s performance began to drop off during this period returning -18.1% over the past three years versus 23.3% returns for IA UK All Companies sector, as at 5 June.
Despite this change of style however, parts of the industry continued to back the star manager with Hargreaves Lansdown naming him on their Wealth 50 list, which was launched last year. The firm only removed him from the list following the trading suspension with little explanation.
In turn, Woodford increased the fund’s weight “dramatically” in small caps, which are defined as the bottom 10% of the market but excluding the bottom 1%, from 22% to 61% by March 2019.
Style Analytics found just three funds that had heavier weightings to small caps; the LF Gresham House UK Multi Cap Income, the Unicorn UK Ethical Income, and the MI Chelverton UK Equity Income.
Furthermore, the fund showed the largest deterioration in return on equity (ROE) across all 56 equity income funds measured highlighting a low quality bias.
By March 2019, there was only one fund with a lower ROE, the Investors UK Equity Income II fund, which is also managed by Woodford.
“From our analysis, it is clear that the Woodford Fund had changed considerably over the past few years.
“What may not have been clear [to investors] was the increase in risk, which came from the shift away from large cap holdings to a significant position in small caps and the associated liquidity risk that came with that move.”