Will Neil Woodford’s new higher income fund hold P2P to boost its dividends?

By Daniel Lanyon on Wednesday 6 July 2016

Alternative Lending

The manager is looking to launch a new fund that will target a higher yield than his flagship Woodford Equity Income fund, a big investor in P2P investment trusts.  

Star fund  manager Neil Woodford is mulling the launch of a new equity income fund that will aim to deliver a higher yield than is currently offered by his hugely popular £8.6bn CF Woodford Equity Income fund. 

Few details have emerged about the timing or structure of the new fund and at present the team at Woodford Investment Management seem to be sounding out demand from potential investors, but a 4.5 per cent target yield has been widely reported. This is a key difference to his flagship fund and a substantial challenge for a long only equity portfolio. Higher yielding equity income portfolios offering an 'enhanced income' mostly use call options alongside normal income stocks to boost income pay-outs.

This strategy seems unlikely for the manager whose brand at his new firm Woodford Investment Management, which he launched two years ago after 25 years at Invesco Perpetual, revolves around transparency and simplicity in approach. Instead will Woodford up his investment into the nascent P2P market? 

Woodford is bullish on P2P/marketplace lending and has invested in the two specialist investment trusts P2P Global Investments and VPC Speciality Lending - which offer attractive yields of 6 per cent and over for his income fund. He also owns an unquoted positon in P2P platform RateSetter.

The manager currently has 0.96 per cent of his fund's assets in the P2P Global Investments trust and 0.64 per cent in VPC Speciality Lending trust. These are, respectively, his 28th and 39th largest holdings.  In total he has 109 holdings.

The largest holdings are blue chip high quality dividend stalwarts from the FTSE 100 such as Imperial Brands (Tobacco), BAT and AstraZeneca.  The new fund – should it launch – is said to be more globally focused and could therefore include stocks listed in other countries. 

His existing fund is currently hitting a yield of 3.7 per cent. P2P GI and VPC Speciality Lending’s yields are currently a whopping 7.4 per cent and 9.7 per cent, respectively. However, that is partly a function of thier near 20 per cent discounts at present. 

When AltFi spoke to the fund manager earlier in the year he said he thought the market could potentially become substantially larger than it currently is.

Analysis from AltFi Data shows the size of the market is currently £7.8bn in size. This represents a growth of £1.8bn since the start of the year.

“The total loans market in the UK...the size of the banks' balance sheet is something like three times GDP [gross domestic product]. That is about £3trn. It is not even discernible in terms of the scale of bank balance sheets. They [P2P platforms] could become massively bigger than they are now and still not really capture any significant share of the total loan market,” Woodford said.

Woodford says the main hurdles for the industry to grow rapidly are time, capital and the pace of its deployment.

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