Investors who have received back some of the money that was locked up in the suspended LF Woodford Equity Income fund have a number of respected active funds, investment trusts and trackers to consider, fund pickers have suggested.
Almost eight months after the fund was suspended and the subsequent collapse of Neil Woodford’s investment empire, the first distributions from the wind-down of the fund – now called LF Equity Income – have been made.
Last week, Link Fund Solutions told investors that they would receive almost three-quarters of the fund’s current value in the first distribution payments, with smaller payments set to follow as the remaining assets are sold.
Holders of LF Woodford Equity Income have been left nursing heavy losses and investment commentators said it would be understandable if they were reluctant to re-invest after such a difficult time.
Performance of LF Woodford Equity Income vs sector and index since launch
Source: FE Analytics
However, interactive investor head of funds research Dzmitry Lipski, AJ Bell head of active portfolios Ryan Hughes and Willis Owen head of personal investing Adrian Lowcock all believe there are equity income funds that could be a good home for those keen to stay in the market.
Lipski starts us off with an index tracker, highlighting the £1.bn Vanguard FTSE UK Equity Income Index fund – the only passive member of the IA UK Equity Income sector – as an option for those who are now less than enamoured with active management.
“The experiences of trapped investors of the Woodford Equity Income fund could sour appetite for actively managed funds in favour of passive solutions,” he said.
“Whilst we think the case for good quality active managers remains strong, there’s a place for good passive options too. And it is certainly a better option than taking fright from fund managers altogether.”
The £1.2bn fund tracks the FTSE UK Equity Income Index, which is made up of London-listed stocks expected to pay dividends that are higher than the market average.
Vanguard FTSE UK Equity Income Index is the cheapest member of its sector with an ongoing charges figure (OCF) of just 0.14 per cent but it has underperformed its average peer over one, three, five and 10 years.
Lipski added that, in spite of the outcome of Woodford Equity Income, “a good approach” is to use a blend of both active and passive funds to diversify portfolios and gave Man GLG UK Income as an example of an active strategy that looks attractive. Both Hughes and Lowcock also backed this fund.
“There are many income funds available that simply allocate to the big dividend payers in the index but this fund is different. Manager Henry Dixon takes a multi-cap approach and also has a value bias, making it a good complement to other traditional equity income funds,” Hughes said.
“In addition, the manager can invest in corporate bonds if appropriate, albeit in a limited manger making this a slightly different UK equity income fund. The strategy currently yields around 5 per cent and pays monthly, making it an interesting option for income seekers.”
Dixon’s approach concentrates on valuations, seeking out companies with strong balance sheets, high levels of cash and greater potential to grow dividends but share prices that are at distressed levels.
However, Lipski added that Man GLG UK Income “is not for the faint-hearted” thanks to its bias towards small UK dividend payers, although it has shown “some exceptional outperformance in the short and medium term despite the style being out of favour”.
Source: FE Analytics
Investors whose experience with Woodford has left them only interested in funds with capital preservation at the very core might want to consider Trojan Income, according to AJ Bell’s Hughes and Willis Owen’s Adrian Lowcock.
The £3.4bn fund, which is run by Troy Asset Management’s Francis Brooke, has a very traditional approach to equity income investing, looking for large-cap companies with strong balance sheets and cash earnings that will support dividend growth. Like all of the funds run by Troy, capital preservation is the main priority and the portfolio is defensive in nature.
“In some respects, Trojan Income has some of the characteristics that were originally associated with Woodford given its focus on capital preservation and a willingness to buck the trend,” Hughes said.
Lowcock added: “This fund offers the potential for solid income and growth over the long run. The focus on companies that tend to be more resilient does mean the fund could fall less than others when stock markets fall. However, it might not go up as quickly when stock markets rise.”
For those who prefer closed-ended strategies, Lipski and Hughes highlighted Job Curtis’ £1.7bn City of London investment trust. It is one of the best-known trusts in the industry, launching way back in 1891 and having its current manager in place since 1991.
Lipski noted City of London’s very strong record of growing its dividend – it has done so every year for more than half a century – and said it has developed “a formidable reputation” as an income-producing investment trust.
Hughes commented: “With the UK having been out of favour for much of 2019, solid yields are now available with the trust yielding 4.3 per cent from a dividend which is paid quarterly making it useful for income seekers.
“Combine this with a hugely experienced manager, a track record of increasing dividends for 52 years and one of the lowest OCFs in the market at 0.39 per cent and you have a trust that is well-placed for income seekers and also those who want to reinvest that income over time.”
Income earned on £10,000 over 5yrs
Source: FE Analytics
Lowcock had another three fund picks that might be contenders for someone looking to reinvest the money freed up by Woodford Equity Income.
He highlighted Richard Colwell’s £4.4bn Threadneedle UK Equity Income fund, which is built around larger high-quality companies that are expected to pay consistent dividends thanks to their strong cash generation. Sitting alongside these are some out-of-favour companies with recovery potential, which may not currently pay a dividend.
“We consider this a mainstream equity income fund run by a very experienced manager which could be suitable for most income portfolios,” Lowcock said. “It aims to pay a high and growing income, as well as some long-term investment growth. Unlike some peers, Richard Colwell doesn’t invest outside the UK.”
Franklin UK Equity Income was also highlighted. The £865.6m fund has been run by Colin Morton since 1995, making him the longest serving manager in the IA UK Equity Income sector, and his approach blends valuation-aware stockpicking with a top-down analysis of the economy.
Lowcock said: “This is a core fund for investors looking for steady long-term income. The fund may underperform in strong market rallies but its long-term performance is supported by its ability to protect in falling markets.”
The final pick is Fidelity Global Dividend, which has been run by Dan Roberts since launch in 2012. The £1.3bn fund is a member of the IA Global Equity Income sector and only has 18.7 per cent of its portfolio in the UK, so might not be an option for those seeking exposure to the domestic market.
“Roberts’ philosophy is to focus on quality companies that can offer a good degree of capital protection during market downturns,” Lowcock finished. “This means the fund may lag in roaring bull markets but we are encouraged by the fact that it has outperformed during the manager’s tenure.”