Neil Woodford has so far confounded his critics since leaving Invesco Perpetual last year and launching the highly popular CF Woodford Equity Income fund.
CF Woodford Equity Income is now almost 18 months old and has done what any fund manager would wish over this period by taking on huge amounts of cash and consistently having been the best or one of the best funds compared to its peers in the IA UK Equity Income sector.
According to FE Analytics, the fund – which is already a whopping £7.6bn – has returned 24.08 per cent since its launch, the best in the 80-strong sector. By comparison, the IA UK Equity Income sector average return over this period is 5.49 per cent while the FTSE All Share is down 0.34 per cent.
Performance of fund, sector and index since launch
Source: FE Analytics
However, it can be said with an almost certainty that Woodford (pictured) will not always be top of the sector over shorter time periods as no funds are and his track record has shown his style can sometimes be out of favour.
Woodford’s previous portfolios – Invesco Perpetual Income and Invesco Perpetual High Income – did very over his long term tenure of 25 years or so but went through several periods where funds with alternative styles jumped ahead.
This illustrates the importance of diversification, and in this article we’ll look at three funds the experts recommend to ‘dovetail’ Woodford’s fund for two discrete purposes: those that want income diversification and those which want a different growth approach.
UK Income - Rathbone Income & Unicorn UK Income
Meera Hearnden, investment analyst at Parmenion tips two portfolios to work together to dovetail with Woodford from an income perspective: the £1.1bn Rathbone Income and £636m Unicorn UK Income funds.
She likes the fact that not only do these funds give exposure to different areas of the UK market, a combination of the three would lead to a highly diverse dividend stream.
“Rathbone Income managed by Carl Stick who takes a multi cap approach, but is pragmatic and has an inherent focus on downside risk within his process,” she said.
“Unicorn UK Income, unlike the Woodford fund has a bias in mid and small caps and this would blend well with Woodford’s predominantly large cap focus.
“Woodford also invests in unquoted stocks which most other managers avoid, but the combination of these three funds could potentially lead to attractive risk adjusted returns over the longer term.”
Stick has headed Rathbone Income since 2000 while Fraser Mackersie and Simon Moon have co-manged Unicorn Income since January 2014.
While the latter arguably does not offer much scope for analysis it is important to mention that two managers have told FE Trustnet that they are “fully indoctrinated” into former manager John McClure’s process.
Looking back at the performance over 10 years of Invesco Perpetual Income, Invesco Perpetual High Income and Hearnden’s two picks, it is clear how the styles contrast. In Woodford’s best years relative to his peers such as 2005, 2006, 2007 and 2008 these tended to be the leaner years for Rathbone Income and Unicorn UK Income.
Then when Woodford lagged behind, these two portfolios rallied.
Performance of funds, sector and index over 10yrs
Source: FE Analytics
Rathbone Income and Unicorn UK Income both have clean ongoing charges figures [OCF] of 0.81 per cent. Their respective current yields are 3.65 per cent and 3.51 per cent.
UK Growth – Standard life UK Equity Unconstrained & Artemis Capital
Nathan Sweeney, senior investment manager at discretionary fund manager Architas, has held CF Woodford Equity Income fund across a number of portfolios but uses Standard Life UK Equity Unconstrained and Artemis Capital to add a more “risk-on profile” when markets are rallying.
Both portfolios highlighted by Sweeney have also contrasted in their performance to Woodford’s two funds over the past decade at various periods.
Performance of funds, sector and index over 10yrs
Source: FE Analytics
He thinks over the longer term this deliver stronger gains than just holding Woodford’s portfolio.
“What you tend to find is Woodford will outperform in more risk-off periods as he is defensively positioned and these fund are more risk-on,” Sweeney said.
“Woodford's is an income fund and when the market sells off it gives you that downside protection but when the market is on the up this fund will outperform.”
“These two funds are at the opposite end of the spectrum. Standard Life UK Equity Unconstrained is very cyclical type companies. If you look at the beta - which measures the sensitivity of fund to benchmark - it will be high.”
Sweeney adds that there is exposure to many of the sectors that Woodford avoids.
The fund has a great track record although its management recently changed following the departure of Ed Leggett to Artemis in June 2015. Over Legget’s seven-year tenure between April 2008 and June 2015, Standard Life Investments UK Equity Unconstrained was the second best-performing portfolio in the highly competitive IA UK All Companies sector with returns of 210.61 per cent.
With Wesley McCoy not even six months in the job, for many it might seem to soon invest but Sweeney thinks otherwise. However, McCoy did actually launch the fund (and considerably outperformed) before Leggett took charge.
"The reason we still hold it and have conviction in it is because the fund is a best ideas fund for Standard Life and they pick all the stocks from a winners list - all the ideas coming from all the analysts within the team. It is less about the manager and more about the team,” he said.
The fund has indeed seen a higher beta performance since McCoy took over with fall of 7.94 per cent, compared to a fall in the index of 5.34 per cent and loss in the sector average of 4.76 per cent.
Sweeney says the Artemis Capital fund managed by Philip Wolstencroft is another good dovetail for Woodford from a growth perspective because of its high beta.
"It is quite a bit less well known. Wollstonecraft is all about earnings upgrades. If you look at where we are in the current business cycle there is a lot of talk about slowing global growth and low inflation with earnings under pressure.”
He says, as a result, not many people have been very risk-off but he thinks that could change and because this fund is very linked to earnings upgrades it will do well in contrast to Woodford’s more defensive bias.
He also it gives greater exposure to small and mid-caps and some exposure to more risky stocks such as financials, industrials and commodities.
Standard Life Investments UK Equity Unconstrained has a clean OCF of 1.15 per cent. Artemis Capital has a clean OCF of 0.89 per cent.
