Is Neil Woodford taking a huge risk with his Income Focus Fund portfolio?
Yesterday afternoon, star fund manager Neil Woodford revealed which stocks had been selected for his new Income Focus Fund. While some names are no surprise, others are likely to raise more than a few eyebrows. Let's take a look at a sample of those which have made the grade and ask: has the UK's most trusted professional investor's need to offer sizeable returns forced him to take on too much risk?
A few old favourites
Taking up over 7% of the portfolio, pharmaceuticals giant Astrazeneca remains a firm favourite with the former Invesco man. No doubt Woodford will be buoyed by the positive outcome from recent trials of its Infinzi lung cancer drug.
Legal & General and tobacco giant Imperial Brands take up the second and third slots in the portfolio. With respective yields of just under 6% and 4.6% for the current year, that's to be expected. Further down, 5.7%-yielding Lloyds Bank also makes an appearance.
While not a part of his hugely popular Equity Income fund, it's easy to see why Woodford has also opted to include Aviva as a significant holding in the Income Focus portfolio. Under the stewardship of CEO Mark Wilson, the £22bn cap insurer has been hiking dividends at a rapid pace over the last few years.
More risk, less reward?
Other selections may be more controversial, however. Indeed, thanks to the need to generate substantial dividends, it seems Woodford has become more contrarian than ever before.
Take the inclusion of utility behemoth SSE. Yesterday's announcement that dividend cover would be "within, but towards the bottom range of around 1.2 to 1.4 times " wasn't particularly reassuring. Theresa May's proposal to introduce a price cap on standard variable tariffs if elected is hardly good news either.
Clothing retailer Next, is another curious selection, particularly as the FTSE 100 giant's high street stores are continuing to struggle as more consumers migrate online. Representing 2% of the fund portfolio, Woodford clearly believes these concerns have been overdone.
Debt-ridden breakdown specialist AA, and troubled outsourcer Capita also make the cut, despite the latter experiencing a truly awful 2016.
Elsewhere, some may consider the inclusion of housebuilders within the portfolio as risky considering that the full impact of Brexit is still unknown. Taylor Wimpey, Barratt Developments, Crest Nicholson and Bovis Homes all make an appearance. According to Woodford however, "people are too downbeat about the UK economy," leaving these stocks trading on "depressedvaluations." Let's hope he's right.
Safety in diversity?
To generate superior results from investing -- be it in the form of capital gains or dividends -- means doing things that many investors wouldn't, in the hope it doesn't backfire. To achieve the 5% yield targeted by the fund, that's exactly what Neil Woodford is required to do. Time will tell as to whether his optimistic outlook on certain constituents was justified.
That said, one of the attractions of investing in funds such as Income Focus is the instant diversification on offer. A less concentrated basket of shares like this might prevent investors from making life-changing gains immediately, but it also offers a degree of security should one, two or several be forced to revise their dividend policies.
So, while I don't necessarily share Woodford's confidence on every selection, the wide spread of companies from different markets and industries should allow those invested to sleep at night.
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Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca, Imperial Brands, and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.