Given the fact that across his five crown-rated Invesco Perpetual High Income and Invesco Perpetual Income funds he runs close to £25bn, his decision to leave has left many investors with a great deal of head-scratching to do. Tim Cockerill, investment director at Rowan Dartington, admits that the change at Invesco will create difficulties, but he urges investors not to be too hasty.
"The thing is, as I have mentioned before, Woodford is a unique manager in a sense. Therefore, if you move away from his funds you are not going to find anything that is the same," he explained.
"What I would say is that you should review your exposure by all means, but don’t rush in to anything," he added.
Nevertheless, Cockerill understands the degree of panic sweeping through the industry and says that there are many options available for anyone who is thinking of switching their equity income exposure out of Woodford's funds.
Artemis Income
Cockerill said one of the first funds that sprung to mind was the £6bn Artemis Income portfolio.
"This is one of the funds I would look at immediately, but it won’t give you the same style as Neil Woodford," he commented.
However, Cockerill says that the fund – which is headed up by the FE Alpha Manager duo of Adrian Frost and Adrian Gosden – has a similar conservative approach to the Invesco Perpetual funds and is one he rates highly.
"These are the types of managers who I trust. They have been around for a long time and have done very well. If you were looking for an immediate alternative, this is one of the funds that fits the bill," he added.
According to FE Analytics, the Artemis Income fund is a top-quartile performer in the IMA UK Equity Income sector over 10 years, with returns of 153.03 per cent. Its benchmark – the FTSE All Share – is up 128.55 per cent over this time.
Performance of fund vs sector over 10yrs
Source: FE Analytics
The fund currently sits in the second quartile over three and five years, though only by a fraction. Artemis Income is very consistent, only underperforming the IMA UK Equity Income sector average in three of the last 10 calendar years.
Like Invesco Perpetual High Income, it tends to lag behind its peers in fast-rising markets, but has a much better record at protecting against the downside.
The fund yields 3.8 per cent and the managers have had a good record of income generation in the past. The portfolio is primarily exposed to large caps, with the likes of GlaxoSmithKline, Centrica and Vodafone appearing in the top-10 holdings.
Artemis Income’s ongoing charges figure (OCF) is 1.54 per cent and it requires a minimum investment of £1,000.
Threadneedle UK Equity Income
Cockerill is also a fan of the £2.1bn Threadneedle UK Equity Income fund, but says it is slightly more aggressive than Artemis Income.
The five crown rated-fund has been run by FE Alpha Manager Leigh Harrison since February 2006, with co-manager Richard Colwell joining them in September 2009. Since Harrison has been at the helm, it has beaten the sector in every year except in 2009, when – like Invesco Perpetual High Income – it failed to rebound as strongly as many of its competitors.
Nevertheless, this consistency means the fund is a top-quartile performer in the IMA UK Equity Income sector over one, three and five years.
The fund has a yield of 3.5 per cent, which is slightly below average for the sector; however, it has grown its net distribution over the last year, which it pays out quarterly.
It has just 51 holdings and, like Artemis Income and Woodford’s funds, its largest individual positions are blue chip mega-caps such as Royal Dutch Shell, AstraZeneca and Unilever.
Charles Younes, analyst at FE Research, says that the Threadneedle fund is the logical alternative for those who are concerned about their exposure to Invesco Perpetual High Income.
"The fund has the typical defensive characteristics that investors look for in a UK equity income fund and the managers are very patient and consistent in their investment approach," he said.
"The fund benefits from Harrison’s ability to spot long-term trends, which are then used by Colwell to identify stocks that will be positively impacted. Both managers are happy to hold stocks for a long period of time and wait for their investment thesis to materialise."
"They have demonstrated impressive stockpicking skills over recent years," he added.
The fund has an OCF of 1.62 per cent and requires a minimum investment of £2,000.
Trojan Income
One of the biggest success stories in the sector in recent years has been FE Alpha Manager Francis Brooke’s £1.2bn Trojan Income fund.
The five crown-rated portfolio was launched in September 2004 and over that time it has returned 119.95 per cent, beating both its sector and benchmark, with considerably less volatility.
Performance of fund vs sector and index since Sep 2004
Source: FE Analytics
However, it has been Brooke’s ability to protect his investors' capital that is the major attraction.
Over five years, for example, Trojan Income has had the lowest maximum drawdown in the sector, it has been the second best for both downside risk and annualised volatility and has the fourth highest Sharpe ratio.
The fund yields 3.85 per cent and is cautiously positioned at this point in time as Brooke is concerned about valuations in the UK equity market.
"With expectations for earnings and dividend growth lower in 2014 we find it difficult to see the market making a great deal of progress from current levels," Brooke explained in his most recent note to investors.
"Volatility triggered by concerns about a technical default in the US could well present a useful buying opportunity and with cash levels of about 8 per cent, the fund is well placed to take advantage of this," he added.
Trojan Income is officially soft-closed, though investors can buy it via a number of fund platforms. It has an OCF of 1.55 per cent.
Fidelity MoneyBuilder Dividend
Another possible option is Michael Clark’s Fidelity MoneyBuilder Dividend fund.
The portfolio, which has five FE Crowns, is a slightly different offering to others in the sector as it can invest outside of the UK – its current international exposure makes up 10 per cent – and can use other assets such as derivatives and preference shares to increase its distribution.
The £634m fund currently has a yield of 4.18 per cent, the majority of which is derived from non-market sensitive, cash-generative companies.
"My preferred investment strategy is to look carefully for companies that steadily generate cash and pay a reasonable dividend that is likely to grow over time," the manager said.
"I characterise this approach as 'safety of income at a reasonable price' and it means I avoid out-of-favour, ultra-cheap stocks, which tend to be high-risk. Instead I buy stocks at a fair price in the knowledge that the stock is stable, has predictable cash flows and has reasonable dividend growth potential."
Fidelity MoneyBuilder Dividend has performed well since Clark took over in July 2008.
Our data shows that it has returned 64.84 per cent over the period, beating both the FTSE All Share and the IMA UK Equity Income sector average. It has also beaten the sector and index over three and five years.
Fidelity MoneyBuilder Dividend has an OCF of 1.22 per cent, making it one of the cheapest options available to investors. It requires a minimum investment of £1,000.
Old Mutual UK Equity Income
Cockerill says that with Woodford stepping down, now could be good time to look at some of the lesser-known managers in the sector.
"People will take this opportunity to reconsider what they want to do with their equity income exposure," he said.
"There will be a lot of investors whose money has sat in Neil Woodford’s funds for a very long time. That would be making quite a big change if they were to move their money, and they need to ask themselves if that is really something they need to do."
"They shouldn’t rush their decision, but if they did want a change, now could be the time to look at some of the newer managers who haven’t received as much coverage," he added.
Cockerill says that Stephen Message, who runs the Old Mutual UK Equity Income fund, is one such manager.
Message took over the nimble £67m fund from Michael Gifford in December 2009. Over that time, it is a top-quartile performer with returns of 64.94 per cent, beating the FTSE All Share by close to 20 percentage points.
Performance of fund vs sector and index since Dec 2009
Source: FE Analytics
The fund is also top quartile over one year.
Message has a different approach to Woodford, describing his portfolio as a FTSE 350 fund. It is yielding 4.4 per cent, has an OCF of 1.73 per cent and requires a minimum investment of £1,000.
