Why I’d still buy Neil Woodford’s income fund after Provident Financial plc’s collapse

Neil Woodford’s long-term returns make up for Provident Financial plc’s (LON: PFG) problems.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Earlier this week, subprime lender Provident Financial shocked the market when it announced that due to a mismanaged restructuring, losses in its doorstep lending business had ballooned to between £80m and £120m. To add insult to injury, the company also announced that its Vanquis Bank credit card business was being investigated by the FCA. To build liquidity to cushion losses and meet any fines stemming from the investigation, the company eliminated its dividend payout.

Star fund manager Neil Woodford is one of the largest investors in the financial services firm. At the end of July, his Income Focus and Equity Income funds had holdings equivalent to 3.4% and 4.1% of assets under management respectively. In both funds, Provident was a top 10 holding.

With shares in Provident down by around two-thirds over the past week, his funds have almost certainly been walloped by the company’s demise. However, despite this slip-up, I believe Woodford’s income offering still looks attractive.

Reassuring investors 

Neil Woodford has issued a statement on Provident’s troubles to try and reassure his investors. It’s reported that Provident’s crash cost his investors as much as £326m extending losses on the popular Equity Income fund, which has lost a reported 2.6% of savers’ money over the last year.

According to the statement, management reassured him only a few weeks ago that the company’s problems were not as severe as they eventually turned out to be. As a result, he is “hugely disappointed by what has happened to the consumer credit division,” but with the rest of the company performing well, and a strong reputation among borrowers, he believes that Provident will eventually “get back on track.

The funds still look attractive

Whether the subprime lender will be able to recover remains to be seen, but this scenario shouldn’t put you off Woodford’s funds.

In the past 12 months, quite a few of his stock picks have struggled, which has dented performance.  Nonetheless, equity investing is a cyclical game, and we need to consider the long term investment returns of this star fund manager, not just short-term market fluctuations.

Indeed, even though the Equity Income fund has underperformed the FTSE All Share by 9.4% over the past year, since launch in 2014 the fund has outperformed by 10%. Over the 25 years before the launch of the new fund, he returned 13.4% per annum, as compared to a return of around 10% per annum for the FTSE All Share over the same period.

It’s Woodford’s long-term performance that leads me to believe his recent struggles are not a reason to sell. His favourite investments are income stocks, which have fallen out of favour over the last few months despite wider market gains. This divergence has resulted in underperformance.

It’s not possible to tell when this trend will reverse. The next bear market could be just around the corner, and when it does happen, safe income stocks will likely outperform, and Neil Woodford’s returns will pick up.

The bottom line 

So overall, while his funds might have sailed into stormy waters this year, I believe that his offerings are still an attractive buy for the long term. In down markets, you can’t go wrong with safe dividend stocks, and no one can pick dividend stocks better than Neil Woodford, as his record shows.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Rupert has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

More on Investing Articles

Investing Articles

Publish Test

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut…

Read more »

Investing Articles

JP P-Press Update Test

Read more »

Investing Articles

JP Test as Author

Test content.

Read more »

Investing Articles

KM Test Post 2

Read more »

Investing Articles

JP Test PP Status

Test content. Test headline

Read more »

Investing Articles

KM Test Post

This is my content.

Read more »

Investing Articles

JP Tag Test

Read more »

Investing Articles

Testing testing one two three

Sample paragraph here, testing, test duplicate

Read more »