28 October 2019
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The Big Question: Alternatives to Woodford
For investors not put off active management by their holdings in Woodford Equity Income, commentators suggest replacements to consider.
Ruli Viljoen, head of manager selection at Morningstar Investment Management Europe
Artemis Income
Investments into equity funds are never without risk. However, investors caught up in the liquidation of Woodford Equity Income will likely be feeling disillusioned.
It is important to remember this event is not the norm and, typically, the investment with the greatest rate of return incurs the greatest amount of risk.
A credible alternative for investors to consider is Artemis Income, which provides investors with core exposure to UK equities with an above-market dividend yield and a growing income stream.
It benefits from a highly experienced management team that, despite some recent turnover, has consistently applied a sensible, tried-and-tested approach.
The fund is managed as a core mandate but due to its considerable size does not have the flexibility to invest significantly down the market-cap scale.
While this has at times proved a headwind, the managers' long-term, consistent approach has largely overcome this issue and its long-term returns versus its FTSE All-Share benchmark were shown to be strong.
Equally important is that this has often been achieved with lower levels of volatility.
Stephen Peters, fund manager at Barclays
Man GLG UK Income
Clients looking to buy Man GLG UK Income should be reassured that the fund does not own unlisted shares, nor have a large exposure to potentially hard-to-trade medium and small-sized companies.
The investment process is robust, based on clear principles rather than macroeconomic pontification and incomplete fundamental company analysis.
The wider team sits within a business that provides real, challenging oversight and governance on how the fund is managed.
Henry Dixon and his team ultimately look for cheap companies that pay a dividend at least equal to that of the market, those that can grow the dividend twice as fast as the market, and bonds that can offer both income and capital appreciation.
The fund, like most in the sector, will show value style characteristics. But the risk of buying 'value traps' is mitigated by trying to buy shares showing improving earnings.
It will own many larger companies found in other UK income funds, but Man GLG is keen that the fund does not grow too big and difficult to manage.
The fund has a well-diversified investor base and fund managers that demonstrate an open and transparent approach to communicating with their investors.
Juliet Schooling Latter, research director at Chelsea Financial Services and FundCalibre
LF Gresham House UK Multi Cap Income
This is not a direct alternative to Woodford Equity Income, but it ticks a lot of boxes, particularly if you liked his domestic focus and are looking to invest in a UK equity income fund for the next ten years or so.
Launched in June 2017, it is multi cap, but invests mainly in micro, small and medium-sized companies. UK equities are generally unloved at the moment and smaller companies even more so.
When we finally get some resolution over Brexit, overseas investors will take another look at our stockmarket, and I think it is a good entry point for long-term investors.
The manager not only has a lot of experience in the small-cap space, but he is also cognisant of capacity issues and keeps a diversified portfolio. Stocks are initially screened for financial strength and cashflow.
Ken Wotton and the team then undertake detailed analysis and focus on the quality of management teams and their alignment with investors. They prefer simple businesses with a clear strategy and a large market opportunity.
Andrew Hardy, co-head of research and portfolio manager at Momentum Global Investment Management
Merian Chrysalis
Those willing to include exposure to unlisted businesses in their portfolio should consider Merian Chrysalis. Merian's UK small- and mid-cap team launched this trust in 2018 to capture the outsized growth potential available in private markets at the pre-IPO stage.
This is becoming an increasingly important area to have exposure to as many of the most innovative businesses are staying private for much longer. The UK represents a fertile hunting ground with dozens of 'unicorns' created in recent years.
Chrysalis represents a highly concentrated portfolio of well established businesses, which are true disruptors within their industries and are capable of sustaining rapid levels of growth for the foreseeable future. Underlying holdings are mostly, but not exclusively, UK-domiciled businesses.
Given the illiquid nature of the underlying investments, the closed-ended structure is appropriate and mitigates many of the associated risks.
Victoria Hasler, director, research and consulting at Square Mile Investment Consulting and Research
Evenlode Income
The managers look to invest in companies that can deliver sustainable growth with limited need for capital reinvestment and can therefore return cash to shareholders through dividends.
While this may sound simplistic, there are surprisingly few funds that follow this philosophy as closely as this strategy.
Compared to some peers, the managers do not have lengthy investment careers. However, they have an acute awareness of the needs of investors.
Their approach, which looks to identify companies that have the ability to deliver steady and consistent dividend growth, has strict criteria that negates the need for a large team of supporting analysts.
One of the potential pitfalls of this style of investing is that the final portfolio will be biased toward specific areas of the market and is likely to be completely absent from others.
The rationale for this is that more cyclically sensitive businesses can be subject to more variable dividend payments as company profits fluctuate with the economic cycle.
Although the fund is now soft closed, it remains open to existing investors.
Ryan Hughes, head of active portfolios at AJ Bell
Troy Trojan Income
The Troy Trojan Income fund would allow investors in the Woodford Equity Income fund to get back to the basics of income investing.
That is, with a manager that understands the importance of risk management, looks for high-quality companies that generate sufficient cash to have a strong dividend culture, and does not get carried away with the latest fads and themes in small-cap investing.
Manager Francis Brooke has a strong focus on large companies and the top ten holdings will be very familiar to all investors, with big positions in the likes of Unilever, Shell and AstraZeneca – a fund that does not feel too dissimilar to Woodford in his heyday at Invesco Perpetual.
Brooke is happy taking a long-term view and has a strong focus on not losing money, making for attractive risk-adjusted returns over time.
It also has a yield of over 4% at the present time.
Dzmitry Lipski, investment analyst at Interactive Investor
Royal London UK Equity Income
With a long fund manager track record under Martin Cholwill since 2005, this is a solid long-term performer with a good yield, paid quarterly.
Cholwill has freedom to invest across companies of any size, with a spread of industries and a value focus, in particular focusing on companies with attractive cashflow characteristics to identify those companies that can consistently support a growing and sustainable dividend.
He believes that it is cashflow that pays the dividend, funding investment for future growth and therefore providing resilience in a range of market conditions.
He often identifies sources of dividend growth outside the well-known names within the FTSE 100 index.The fund is underpinned by cautious economic growth assumptions, and a focus on strong market positions, cashflow-backed dividends and robust balance sheets should help provide resilience in a whole range of possible economic outcomes.
However, Cholwill says it is stock selection, based on thorough company research, including meeting management teams, that is the main driver of the fund’s performance.
Ben Yearsley, co-founder and investment consultant at Fairview Investing
Franklin UK Equity Income
This is a core holding, something that Woodford was in the olden days. Some might call it a bit stodgy, but for me it is a core long-term equity income holding doing exactly what it says on the tin.
Colin Morton has run the fund for over 20 years and little has changed in that time – it is still managed from Leeds.
A minimum of 70% will be invested in FTSE 100 companies and typically that number is over 75%. Everything has to pay a dividend; some funds out there have been relying on a few heavy payers to compensate for non-yielding stocks, but not with this fund.
Reliable cashflow and therefore dividends are important, and even though the sector requires funds to produce a yield of only 100% of the FTSE All Share’s yield now, Colin Morton still sticks to the old rule of 110%.
Large-cap stocks have a maximum of 5% invested, whereas any mid- and small-cap names have a maximum of 1% to 2%. Despite the long-term record, and the keen pricing of 0.52% OCF, this fund is under £800m.
For investors not put off active management by their holdings in Woodford Equity Income, commentators suggest replacements to consider.
For investors not put off active management by their holdings in Woodford Equity Income, commentators suggest replacements to consider.
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