The fund, which is set to be launched at the beginning of next week, will surely not rival Invesco Perpetual Income and High Income in terms of size for the time being, but some experts predict it could attract as much as £3bn in its first week.
Such a volume of assets makes it difficult for managers to access small and mid-cap areas, though Woodford insists large cap defensives are by far the most attractively valued stocks across the FTSE All Share anyway.
Psigma’s Tom Becket recently told FE Trustnet that he believed Neil Woodford was too one dimensional, and is backing UK Equity Income managers with a balanced between small, mid and large caps, and defensives and cyclicals.
However, those who want access to the highly experienced manager may instead opt to hold another UK Equity Income fund that complements Woodford’s large cap, quality bias. Here are three you may wish to consider.
Henderson UK Equity Income & Growth
While it is now sitting in the IMA UK All Companies sector due to concerns over yield targets, FE Research analyst Charles Younes believes that FE Alpha Manager James Henderson’s Henderson UK Equity Income & Growth fund would make a good combination with CF Woodford Equity Income. Henderson (pictured) is more positive about the global economic recovery, and has more of a focus on delivering capital growth than Woodford.
Younes says that Woodford is likely to hold up better in falling markets, but that Henderson would help to pick up the slack when lower quality assets rise.
“Henderson places a strong emphasis on dividend growth when analysing companies and does not hesitate to stray away from the typical large UK firms paying high and sustainable dividends,” Younes said.
“It could therefore be viewed as a complementary product to some of the popular choices in the UK Equity Income sector.”
The top 10 holdings of Henderson UK Equity Income & Growth and Invesco Perpetual High Income – which the vast majority of experts suggest will look very similar to CF Woodford Equity Income – are very different.
AstraZeneca is the only stock that appears in both. All of the Invesco fund’s biggest holdings are FTSE 100 companies, while Hiscox is in the FTSE 250 and Hill & Smith is a small cap stock.
Invesco Perpetual High Income protected much better against the downside in 2008 than its peers and actually made an 8.99 per cent return in 2011. Henderson UK Equity Income & Growth fell further than the FTSE on both occasions, but his strong performance during up markets saw the fund underperform Invesco Perpetual High Income over one, three and five year periods – all up until Woodford’s departure in March this year.
Performance of funds and portfolio over 3yrs
Source: FE Analytics
The graph above shows how Woodford protected much better against the downside in the three years to his exit, while Henderson powered ahead in the rising years of 2012 and 2013.
According to FE Analytics, the two funds have a correlation of 0.67 over three years, which represents a "low correlation".
Industrials and financial dominate Henderson’s fund, while healthcare and consumer staples are the biggest positions at Invesco.
Unicorn UK Income
While Henderson has a willingness to invest down the market cap scale, large caps still make a very big contribution to performance.
For something completely different, FE Alpha Manager John McClure’s Unicorn UK Income fund is a possibility.
With the exception of one or two short-term holdings, McClure invests exclusively in small and mid-cap companies. The fund has even less of a correlation to Invesco Perpetual High Income over three years – just 0.47, according to FE Analytics data.
“The manager pursues income while still looking for capital growth and this has resulted in an unusual portfolio relative to core income portfolios, as well as a diversified earnings stream,” noted the FE Research team.
The fund outperformed Invesco Perpetual High Income from its launch in 2004 up until Woodford’s departure, and was also ahead over the shorter-term. It has also significantly outperformed the Henderson fund in recent years.
Performance of funds March 2007 – March 2014
Source: FE Analytics
“McClure seems to have disproved the idea that smaller companies are riskier than their larger counterparts. His portfolio may be more exposed to downturns in the UK economy than the average fund in its sector, but it also rebounds more sharply, providing solid returns to investors over the long-term,” the team added.
Unicorn UK Income has protected better against the downside than its Henderson rival, and has the best record of any UK Equity Income fund in up markets.
FE Research’s only concern with the fund is the burgeoning size of Unicorn UK Income, which could make it harder for McClure to maintain a small cap focus: FE data shows that fund has grown from less than £50m to almost £700m in the space of just two years.
McClure says the group has recently stopped marketing the fund, which is often a precursor to a soft-closure. For now, it remains open to new money, however.
Schroder UK Alpha Income
Whereas Invesco Perpetual High Income has benefited from its ultra long-term sector and stock bets, Schroder UK Alpha Income has a much higher turnover.
Manager Matt Hudson attempts to invest in the areas that he believes will benefit from where the UK is in its business cycle. This means a switch between more cyclical areas including mid caps when Hudson is positive, and more defensive areas when he is more cautious.
“The fund’s investment process is tested every day at Schroders. It requires precision timing to work successfully, because calling a recovery too early or too late would cause the fund to lag behind its competitors,” he said.
“This strategy is used by many Schroder funds and has a proven track record of anticipating economic trends.”
Schroder UK Alpha Income is something of a happy medium between Woodford’s defensive portfolio and higher beta options such as Unicorn UK Income. While it doesn’t boast a record as good as Invesco Perpetual High Income in down markets, it has consistently outperformed its peers, and has been better at capturing the upside in recent years.
Source: FE Analytics
For those that like Woodford's style but want some added cyclical exposure at certain phases of the cycle, Schroder UK Alpha Income could be an attractive accompaniment.
