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Woodford’s new fund: ‘There’s no need to rush in at launch’

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19/05/2014
Neil Woodford's new fund will be open-ended and not in limited supply, writes Bestinvest's Jason Hollands.

While some brokers promoting the new launch of the CF Woodford Equity Income fund are urging investors to “get in on the ground floor” and “be in at the beginning” it is important not to lose sight of the fact that this fund will be open-ended and not in limited supply.

Neil Woodford has previously managed over £30bn in assets, so my hunch is this fund is going to be around a long time before he starts to worry about size.

There really is no need to rush into the fund at launch (on 2 June) just to make your broker happy during the quiet month of June if the timing isn’t right for you.

It’ll still be around at the end of the tax year, when many investors prefer to use their ISA allowances.

There is no doubt that Neil Woodford has had an impressive career. He has pretty much been on Bestinvest’s list of rated-funds continuously for the last two decades, which is some achievement in an industry where stars come and go.

Woodford is a manager at his best in tougher times, reflecting a more defensive investment approach, with valuation a key driver in his process. If you are bullish on UK equities there may be other managers who will fare better.

Against the blitz of publicity the new Woodford fund is currently getting, it is also important to remember that there are other UK equity income funds worth seriously considering. Unlike the CF Woodford Equity Income fund, some of these may be in limited supply.

Below we identify five alternatives to CF Woodford Equity Income.

Three core choices for UK equity income exposure:

1. Threadneedle UK Equity Income – in our view this pragmatically managed fund, run by Leigh Harrison and Richard Colwell, is the strongest all-rounder in the UK Equity Income sector. The fund has been incredibly consistent, beating the FTSE All Share Index in each of the last four years on the trot, with a below average annualised volatility of 11% per annum. The five year total return is +116% and the current yield is 3.6%.

2. Fidelity MoneyBuilder Dividend – this fund, managed by Fidelity stalwart Michael Clark, is a core choice for investors wanting a more conservative “blue chip” approach. It has exhibited low levels of historic volatility, 9.5% pa, which is similar to the level seen on Woodford’s old Invesco Perpetual funds. The fund has returned +105% over the last five years and is currently yielding 3.9%.

3. Schroders UK Alpha Income – of course Neil Woodford has assembled a serious fan club, but the big household names all started out as unknowns. One of the rising stars in the UK equity income sector is Matt Hudson, who recently came into the Schroders orbit through their acquisition of Cazenove Capital.

While a core UK Equity Income fund, this pursues a more concentrated investment strategy than many of its peers, with up to 55 stocks held. Whereas Woodford is known for holding favoured stocks for many years, Hudson will adapt his portfolio to suit different stages of the business cycle. It is an approach that has delivered impressive results, with the fund returning 132% over five years at 12.7% pa volatility, broadly similar to the FTSE All Share Index. The fund currently yields 3.9%.

For investors wanting a more high octane approach to equity income investing, here are two funds that differ considerably from the defensive style and blue-chip focus they might get with the CF Woodford Equity Income fund:

4. Standard Life UK Equity Income Unconstrained – if you are prepared to take on more risk in the pursuit of higher rewards, then this fund managed by Thomas Moore should be on your radar. It invests a much greater proportion of the portfolio in small and mid-cap stocks than the typical equity income fund, with around 47% in mid-caps and 22% in smaller companies. These are the parts of the UK stock market which have a greater exposure to the strong recovery in the UK economy.

The more racy approach is reflected in the 16.1% pa volatility but with a five year return of +173%, investors have been rewarded. The current yield is 4%. The flexibility to invest across the market cap spectrum, including smaller companies is key for this fund, and we would not be surprised if at some future point Standard Life “soft closed” it to new investors. However, for now the £486m fund is open for business.

5. Unicorn UK Income – this is a different beast entirely to the typical, FTSE 100 biased equity income fund in that despite its innocuous name, it focuses on mid-caps and smaller companies (73% is in smaller companies). The fund is managed by veteran stock picker John McLure, who caps each holding at no more than 5% of the fund. You won’t see the usual blue chip banks and pharma companies that appear in the top holdings of most equity income funds; instead major holdings include the likes of laundry and textile services business Berendsen, movie-theatre chain Cineworld and brewing and pub company Marston’s.

The fund has delivered a stellar return of 249% over five years, ranking it the best performer in the sector, a period over which it has outperformed in each of the last five 12-month periods. The fund currently yields 3.8%. The fund is circa £700m in size and our expectation is that it will soft close within months, so investors interested in the fund should not wait until the end of the tax year (unlike the new Woodford fund, this is likely to be in short supply).

 

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