It’s been a sobering start to the week for income investors as news broke yesterday that the £3.10 billion Woodford Equity Income Fund was being wound up.
Dealings in the fund were suspended back in June this year as it struggled to meet client redemptions, finding itself in what was effectively a liquidity trap.
The administrators to the fund, Link Fund Solutions, wrote to holders yesterday to tell them that Neil Woodford was being fired as the fund manager and that the winding-up process would begin in January 2020. The fund will be divided into two parts containing its listed and unlisted assets and then liquidated.
Selling the listed assets should prove relatively straightforward, however disposing of the controversial unlisted assets may prove much trickier.
Not least because it was these type of assets that created the fund’s liquidity crisis in the first place.
The administrators hope to be able to make the first of a series of payments to fundholders by the end of January. However, they were unable or unwilling to say how quickly further distributions might follow.
Whilst not totally unexpected the demise of this flagship fund still comes as something of a shock and has effectively been the catalyst for the closure of all of Mr Woodfords investing operations, which at one point managed as much as £14.0 billion in assets.
The news has also thrown light on to the difficulties faced by income investors in a low or even negative interest rate environment.
Typically income investors look for yield through stockbrokers rather than capital growth, they like a steady stream of dividend or coupon payments, that are available to them, without too much in the way of risk.
However, with many government bonds offering negative yields they are being forced to cast their net wider and wider and the sweet spot between risk and reward, namely a sustainable and reliable income stream is becoming ever more elusive it seems.
The announcement about the fate of Woodford Equity Income came hot on the heels of some research looking at the dividend landscape in UK equities. Rather ironically or perhaps appropriately produced by Link Group, a company similarly named, but independent of Woodford administrators.
Their quarterly UK dividend monitor report highlighted the fact that UK dividend payments fell by -3.0% in the last quarter their largest dip for three years the picture for UK dividends was not entirely bad news special dividends of around £3.20 billion helped to push the total payout from UK companies to four times the figure seen in the same period last year.
Weaker Sterling exchange rates have also helped to boost payout ratios among dollar earners as clients of leading Forex brokers will be all too aware.
The issue comes if we look past these potential one-off payments and instead focus on regular dividends. Vodafone recently slashed its dividend reducing the payout from the UK telecoms sector by -40% in the quarter, and dividends from the retail sector fell by almost -20% thanks to problems at Marks and Spencer, Super Dry and Dixons Carphone Warehouse.
Diversification, sustainability and dividend growth are key goals for income investors.
High yields and high payout ratios are often an indicator of underlying issues in a company. While well-funded replacements for previously reliable dividend payers are not that easy to find
The fear would be that the pool of dividend aristocrats available continues to shrink, which in turn could lead to risk concentration for income investors. We only have to think back to the near demise of Lloyds Bank, a decade ago to realise how painful that can be.
One way to diversify that risk is to invest in ETF or Exchange-Traded Fund there are several specialist UK Dividend ETFs and others that look for income from dividends across the globe.
Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.