Yesterday afternoon, star fund manager Neil Woodford revealed which stocks had been selected forhis new Income Focus Fund. While some names are nosurprise, others are likely to raise more than a few eyebrows. Lets take a look at a sample of those which have made the grade and ask: has the UKs most trusted professional investors 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 giantImperial 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, thats to be expected. Further down, 5.7%-yieldingLloyds Bankalso makes an appearance.
While not a part of his hugely popular Equity Income fund, its 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 behemothSSE. Yesterdays announcement that dividend cover would be within, but towards the bottom range of around 1.2 to 1.4 times wasnt particularly reassuring. Theresa Mays proposal to introduce a price cap on standard variable tariffsif elected is hardly good news either.
Clothing retailerNext, is another curious selection, particularly as the FTSE 100 giants 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 specialistAA, and troubled outsourcerCapita 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,leavingthese stocks trading on depressed valuations. Lets hope hes 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 wouldnt, in the hope it doesnt backfire. To achieve the 5% yield targeted by the fund, thats 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 dont necessarily share Woodfords 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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