In a new blow for Neil Woodford, Morningstar has downgraded his signature £6bn equity income fund from silver to bronze following concerns about its positioning.
Morningstar senior research analyst Peter Brunt says that “extreme positioning” in less-liquid parts of the market have made the fund “less nimble” than others.
He says: “While Neil Woodford is broadly targeting the same kind of opportunities as those of his Invesco Perpetual days, there is a greater exposure to stocks found at the lower end of the market-cap scale and to unquoted companies.
“The bias to the former has become far more pronounced over the past couple of years, in part as a result of Woodford’s more positive view on the UK economy since first-quarter 2017.
“While the group has shown its ability to meet sizable redemptions over the past year, with the fund still standing at over £6bn, such extreme positioning in less-liquid parts of the market make it less nimble than competitors.”
Brunt points out that a number of high-conviction holdings have also experienced stock-specific problems over the past couple of years.
He says: “While contrarian investing comes with a degree of risk and issues could be expected from time to time, the nature of some of the problems and respective position sizes in the portfolio give us cause for concern.
“As a result, while we believe that the fund still has long-term investment merit, our conviction has waned, seeing the Morningstar analyst rating lowered to bronze.”
The news comes after last week’s decision by Charles Stanley Direct to ditch the equity income fund from its list of preferred holdings over concerns about investments in early-stage businesses.
In March, the fund was also moved out of the Investment Association’s Equity Income sector after failing to beat the FTSE All Share index over the past three years.