Should you invest in Neil Woodford's new fund?
Woodford Asset Management confirmed in early May that ex-Invesco star Woodford's new fund, CF Woodford Equity Income, will open for investment on 2 June, prompting announcements from a number of wealth managers and analysts that they will be investing in and recommending the fund.
These include Hargreaves Lansdown's head of research Mark Dampier, who says he believes Woodford "to be the finest fund manager of his generation". He adds: "I look forward to introducing his new fund to our clients."
Don’t be fooled by past performance
However, some industry professionals, including Chase de Vere's head of communications Patrick Connolly, are warning investors to be sceptical of such warm praise and blind faith in Woodford's fledgling fund. They reiterate that past performance is not an indicator of future returns.
"There is no guarantee when fund managers move that they're going to repeat the success they have had previously," says Connolly. He adds: "In a lot of cases, managers do well because their styles have been in favour for a long time, or they may have had a bit of luck. While I don't think that applies to Woodford, he is going to be working in a different environment with a different team and resources."
Kim Barrett, director at advisory firm Barrett Financial Solutions, echoes Connolly's concerns, drawing on a sporting analogy to illustrate his point. "You can compare fund managers to football managers: they have this big reputation, but just because they [deliver] goals for one team doesn't mean they will for another - it has got to be the right environment," he says.
Barrett also expresses concern at the seemingly 'superficial' decisions being made by wealth managers such as St James's Place, which recently placed more than £3.5 billion of assets pulled from Invesco Perpetual with Woodford Investment Management after Woodford announced his departure last October.
He says: "It seems odd. People are making these far-reaching decisions for their clients, but do their clients want this disturbance? It all seems a bit 'old boys' network’, and that's not how the industry should be now; it should be above that, if only from a regulatory point of view."
Connolly also advises investors to bear in mind the vested interests that some analysts and researchers may have in promoting Woodford's fund. "In many cases, they're trying to get new money into their company, and the only way they can do that is to promote funds," he says.
Brian Dennehy, managing director of Fundexpert.co.uk, reminds investors that the performance of a new fund in the first 12 to 24 months is typically "driven by luck rather than the skill of the fund manager, even if it is Neil Woodford".
He adds: "The accident of when the fund is launched drives early performance, because we have no idea - let alone certainty - as to what will drive markets in that period."
Dennehy concludes: "Our view is that buying new launches is mostly pointless, unless the fund provides unique access to an asset class or strategy not available elsewhere, for example. This fund doesn't do either of those things, so we would wait at least six months before considering it, and then we would begin to compare its actual performance with the many alternatives."
Five established alternatives
If you aren't convinced by Woodford's new offering, here are five Money Observer Rated Fund alternatives.
Schroder UK Alpha Income
Formerly Cazenove UK Equity Income, the £898 million Schroder UK Alpha Income fund has been managed by ex-Cazenove director Matthew Hudson since its inception in 2005, during which time it has outperformed both its sector and benchmark - IMA UK equity income and the FTSE All Share index - by over 22%.
Hudson tends to sticks to traditional large-cap income stocks with his top-10 holdings including all the usual suspects: Shell, Rio Tinto, Glaxo, BP, Vodafone etc., with the odd punt on mid-cap names such ascable tie manufacturer Hellermann Tyton. With a yield of just under 4% and a steady history of consistent payouts, the fund is a solid income choice.
Threadneedle UK Equity Income
On a slightly lower yield of 3.5% is Leigh Harrison's £2.8 billion Threadneedle UK Equity Income fund, which since launch in May 2009 has also outperformed both the IMA UK equity income sector and FTSE All Share index, returning 110% compared to 94% and 90% from the latter.
It is also one of the more consistent funds in the sector, delivering first or second-quartile returns every calendar year since launch with below average volatility. The portfolio is a standard income bearer, however is underweight oil and gas stocks and is rather more concentrated than many of its peers with only 51 stocks.
Henderson UK Equity Income & Growth
The smallest fund of our selection, Henderson's £543.6 million UK Equity Income & Growth fund, has been a strong performer since its inception in 1974. More recently, it has produced top-quartile returns over one, three, five and 10 years, returning 156% since May 2004. That compares to 125% from the IMA UK All Companies sector that it recent joined, having been turfed out of the UK equity income sector for failing to meet strict yield requirements.
Since 2005 it has been managed by James Henderson, a long serving Henderson manager with a value-driven investment style. At 128 holdings the portfolio is well diversified and top stocks include both large-cap names such as BP and Rio Tinto as well as mid and small-cap players like Hiscox and Hill and Smith Holdings.
Invesco Perpetual Income
As Woodford's former fund, the enormous £7 billion Invesco Perpetual Income fund has a strong track record; over 10 years it beats every any other fund in the UK equity income sector with a return of 195%, while returns since January 1995 stand at a staggering 855% compared to 397% from the sector and 367% from the FTSE All Share index.
Woodford's former colleague Mark Barnett now runs the fund and boasts a strong track record of his own, delivering a sector-topping 245% over 10 years in his Perpetual Income and Growth Investment Trust. Woodford's defensive style means that Invesco Perpetual Income has underperformed over the past year as markets have rallied, however it has picked up a little under Barnett's watch, beating the sector over one and three months.
Managed by Carl Stick since 2000, Rathbone Income is another solid UK equity income selection. Capitalised at £818 million, the fund carries a yield of 3.6% and most of the its holdings - 56% - are FTSE 100 companies, although at 7% of the fund Stick does have a little more than some of his peers in small-cap companies.
Performance-wise the fund is top quartile over three and five years, however like other funds with a quality bias it has suffered over one year, returning 6.6% compared to 8.2% from the UK Equity Income sector. As markets have re-focused on quality in recent months the fund has picked up and its large exposure to the UK services and consumer products sectors should bode well going forward.
This feature was written for our sister website Money Observer
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.