His high conviction style has influenced the style of countless managers, and he will most likely bring further gains to countless investors with his new venture – CF Woodford Equity Income. That said, SG Wealth Management’s Neil Shillito says the borderline “cult following” of Woodford, which will see more than 40 per cent of FE Trustnet readers part with their money in early June, is potentially dangerous, denying investors access to funds that have been more than a match for Invesco Perpetual Income and High Income in recent years.
Woodford’s impressive performance has been characterised by significant outperformance with below average volatility, which a number of funds have also achieved; in some cases, to an even greater extent.
Here, we highlight three UK Equity Income managers that have beaten the star manager over a seven year period – a staple measure of a full market cycle – whilst also delivering below-average volatility.
All performance data is measured to the day Woodford relinquished responsibility of the two Invesco funds in March 2014.
Francis Brooke
The FE Alpha Manager prides himself on delivering above average returns with below average volatility, and that’s exactly what he’s achieved since its launch in 2004.
As well as significantly outperforming the market, sector average and Invesco Perpetual Income over the past seven years, the fund has been the least volatile fund of its kind.
Risk/return of IMA UK Equity Income funds over 7yrs
Source: FE Analytics
Between 6 March 2007 and 6 March 2014, the fund has returned 75.45 per cent, compared to 44.61 per cent from the UK Equity Income sector average and 63.65 per cent from the Invesco fund.
Trojan Income is slightly behind its rival over three and five years however, though it has been less volatile on both occasions.
Trojan Income was the very best performing fund of its kind in 2008 losing just 12.14 per cent. Woodford lost 19.94 per cent over the calendar year, while the sector was down 28.54 per cent.
FE Research sees the fund as a viable alternative to Invesco Income, given its similar risk-profile. They note that Brooke shares Woodford’s concerns over the sustainability of the economic recovery, and is cautiously positioned as a result.
“Brooke says that the fund is a bit boring, which is not a problem if it means steady returns and low volatility,” they said.
“He does not look for tremendous performance in market rallies, but is more concerned about preserving investors’ capital in real terms, adjusted for inflation – a foundation of Troy’s investment process.”
Trojan Income is currently yielding 3.72 per cent. Top-10 positions include Woodford favourites such as GlaxoSmithKline, AstraZeneca and Imperial Tobacco, as well as BP and Shell.
Leigh Harrison
Proponents of Leigh Harrison usually highlight his £2.8bn Threadneedle UK Equity Income fund, but the Threadneedle UK Alpha Equity Income fund has not only better performance, but also a much longer track record.
Launched in 2006, the fund is essentially a higher-conviction version of its larger counterpart. The fund has 48.7 per cent invested in its top-10 compared to 42.8 per cent in UK Equity Income, and has a smaller tail.
Like Woodford, Harrison and co-manager Richard Colwell use a mixture of bottom up and top down analysis, investing only in quality companies with sustainable earnings and strong balance sheets.
This has enabled them to keep volatility well below its sector average and FTSE All Share benchmark over seven years, but the pair’s arguably greater emphasis on growth has also seen them excel from a total return point of view.
Threadneedle UK Alpha Equity Income has returned 82.02 per cent over the period, beating Invesco Perpetual Income by 18.37 percentage points.
Performance of funds March 2007 – March 2014
Source: FE Analytics
The fund has been more volatile than their Invesco rival, but the margin of outperformance has compensated for this.
Threadneedle UK Alpha Equity Income has a sharpe ratio – the standard measure of risk-adjusted return – of 0.49 over the seven year period, compared to 0.47 from Invesco Income.
Harrison is ahead of Woodford over a three and five year period as well – again up to March 2014. “Despite [the managers’] target of generating a higher income than the FTSE All Share, they manage the fund with a total return approach,” said FE Research.
“Price return is therefore taking into consideration before investment as they look for companies with sustainable growth potential over the medium- to long-term. They are not interested in a company for income purposes only.”
There is a lot of overlap with Woodford’s favourite stocks, with AstraZeneca, GlaxoSmithKline, Imperial Tobacco and BAE Systems all top-10 holdings. Among Harrison’s different bets include Pearson and National Express Group.
Like Trojan Income, it is much smaller than Invesco Perpetual Income, meaning it is more nimble and can more easily take positions in small and mid-caps if the managers see fit.
CF Woodford Equity Income will no doubt be much smaller than the Invesco fund initially, though early estimates believe it could be the first multi-billion pound launch.
Mark Barnett
Last but by no means least, FE Alpha Manager Mark Barnett stakes a claim as one of Woodford’s biggest rivals.
It is unclear to what extent Woodford influenced Barnett and vice versa, but the latter’s Invesco Perpetual UK Strategic Income fund has arguably been the standout performer in the sector in the seven years to Woodford’s departure.
As well as being the second best performing fund in the entire sector with returns of 88.38 per cent, it has the fifth lowest annualised volatility. According to FE data Strategic Income has a volatility of 12.46 per cent, compared to 12.35 per cent from Invesco Income.
Performance of funds and sector March 2007 – March 2014
Source: FE Analytics
The manager’s flexibility to invest in mid-caps has been the biggest driver of the outperformance versus Woodford. Thomas Cook has been one of Barnett’s most successful stock picks of recent years, but he has trimmed his exposure on the back of such strong growth.