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What are the alternatives to Woodford’s closed equity income fund?

05 June 2019

With the news that Neil Woodford’s LF Woodford Equity Income fund has been gated, FE Trustnet asks several fund pickers which strategies they recommend as alternatives.

By Rob Langston,

News editor, FE Trustnet

Man GLG UK Income, Trojan Income and Threadneedle UK Equity Income are among a number of funds recommended as suitable alternatives to LF Woodford Equity Income after it was gated over growing liquidity concerns.

Just days shy of its fifth anniversary, LF Woodford Equity Income has been forced to close to redemptions, subscriptions and transfers as poor performance and concerns over unquoted stocks in the portfolio led to significant outflows from the strategy.

Data from FE Analytics suggests that £1.8bn was redeemed from the star manager Neil Woodford’s flagship fund over the year to the end of April, while market losses also contributed to its falling assets.

The decision to gate the fund was announced by authorised corporate director Link Fund Solutions, which said the asset manager would aim to reduce exposure to some of the unquoted stocks and less liquid names in the portfolio.

Emma Wall, head of investment analysis at Hargreaves Lansdown, noted that the suspension of redemptions had followed a period of underperformance and outflows for the strategy.

Since launch in June 2014, LF Woodford Equity Income has returned just 0.36 per cent compared with a rise of 30.31 per cent for the FTSE All Share benchmark and a 29.22 per cent gain for its average IA UK All Companies peer. It was moved to this sector after failing to meet the yield requirement of the IA UK Equity Income sector (where the average fund is up 24.43 per cent).

Performance of fund vs sector & benchmark since launch

 

Source: FE Analytics

“We are advocates of long-term investing and think Woodford’s multi-decade track record remains compelling – but we don’t underestimate the disappointment investors must feel with Woodford’s recent performance,” Wall said.

“The suspension is understandably frustrating, but it’s important to remember that the value of your investment will be dependent on the share prices of the portfolio’s underlying holdings, which are not directly impacted by the suspension.”

Interactive Investor investment analyst Dzmitry Lipski said existing investors should not panic; instead, the best thing to do is to sit it out and wait for the firm to provide further clarity as to how the fund will be managed going forward and how Woodford is planning to resolve the issues.

However, Lipski said the fund is very different strategy to when it was launched three years ago with many of the illiquid, unquoted stocks transferred to its closed-ended sister fund Patient Capital Trust.

“But clearly when there is a run for the door, any unquoted holdings are going to be problematic,” he added.

As such, FE Trustnet asked several experts which funds they would recommend for investors looking for an alternative to LF Woodford Equity Income.


 

First on the list is GDIM Discretionary Fund Managers’ Tom Sparke, who highlighted the popular Man GLG UK Income fund overseen by FE Alpha Manager Henry Dixon.

“Dixon uses a valuation technique to identify undervalued companies and undervalued returns within UK companies,” said Sparke. “Using this discipline he is able to build a portfolio that not only has an impressive yield – currently over 5 per cent ­– but that is also good value versus the wider market and therefore has good potential for capital appreciation too.

“The fund has an enviable track record over the short and long term so it is appropriate for income seekers as well as those looking for total return.”

Since Dixon took over the £1.1bn fund in November 2013, Man GLG UK Income fund has made a total return of 61.12 per cent, against a gain for the FTSE All Share of 35.45 per cent and a return of 30.43 per cent for its average IA UK Equity Income peer.

Performance of fund vs sector & benchmark under manager

 

Source: FE Analytics

The four FE Crown-rated fund currently has a yield of 5.3 per cent and an ongoing charges figure (OCF) of 0.90 per cent.

Sparke’s second choice is the £118.4m Investec UK Equity Income fund, managed by Blake Hutchins.

“Although this fund doesn’t have the longest of track records, it has been impressive in terms of performance and risk-adjusted returns in the four-years it has been running,” said GDIM Discretionary Fund Managers’ Sparke.

He said Hutchins has achieved top-quartile performance across both one- and three-year periods, adding: “His concise approach to portfolio management means that the fund can experience mildly elevated volatility but this has been more than made up for in terms of overall returns.”

Over three years, Investec UK Equity Income has made a total return of 29.49 per cent compared with a gain of 29.10 per cent for the FTSE All Share index. The fund has a yield of 3.10 per cent and an OCF of 0.84 per cent.

While a fan of Henry Dixon’s strategy, Willis Owen head of personal investing Adrian Lowcock highlighted two other equity income funds that investors can turn to.

The first is the £4bn Threadneedle UK Equity Income fund, overseen by veteran fund manager Richard Colwell. Lowcock noted the manager’s ability to invest in both growth and value stocks to meet his capital growth and steady income objectives.


 

“Colwell’s primary focus is on stock selection and he has a mix of high quality companies, with strong cash generation, and out of favour companies with recovery potential, which may not pay a dividend,” he said.

“The fund is unconstrained but is predominantly invested in large blue-chip companies although the manager will take significant sector bets against the index according to his thematic views.”

Under Colwell, Threadneedle UK Equity Income has made a total return of 129.71 per cent compared with a 94.63 per cent gain for the FTSE All Share index and 97.88 per cent for the average peer since September 2010. It has a yield of 4 per cent and an OCF of 0.83 per cent.

Lowcock’s second fund is Troy Asset Management’s Trojan Income – overseen by FE Alpha Manager Francis Brooke and Hugo Ure – which he said is managed in line with the firm’s conservative investment philosophy.

The company has a long history in wealth management and its investment process is designed to preserve investors capital by careful management of risk,” said Lowcock.

“Brooke uses strict criteria to identify high quality companies that can produce steady, long-term income and capital growth.”

Drawing from the FTSE 350 but with a bias to companies at the larger end of the universe, Trojan Income’s screening process results in overweight positions in defensive sectors such as healthcare and low exposure to cyclicals.

“Valuations drive the entry and exit points for stocks although turnover is low,” said Lowcock. “The proven strategy has delivered impressive returns and a healthy yield.”

Performance of fund vs sector & benchmark since launch

 

Source: FE Analytics

Since launch in September 2004 the fund has made a total return of 234.03 per cent compared with a rise of 191.87 per cent for the FTSE All Share index. The fund has a yield of 4.1 per cent and an OCF of 1.02 per cent.

For something a bit different, FundCalibre managing director Darius McDermott recommends looking at strategies with a focus further down the market capitalisation scale.

"Of the 86 funds in the IA UK Equity Income sector, just six have produced positive returns in the past 12 months, as equity markets around the world have fallen,” he said. "One of these funds is LF Gresham House UK Multi Cap Income.

“Run by Ken Wotton, and launched two years ago in June 2017, it has a bias towards smaller-sized UK companies and has a target yield of 4 per cent.”

Since launching on 30 June 2017 LF Gresham House UK Multi Cap Income – which is co-managed by Brendan Gulston – has made a total return of 18.51 per cent against a 0.19 per cent rise for the average IA UK Equity Income peer. The fund has an OCF of 0.99 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.