Fund buyers and analysts have broadly backed the management team behind the reopened Income Focus vehicle formerly run by Neil Woodford, but questions remain with regard to fees, portfolio manager past performance and the cost of shedding the new-look portfolio’s former holdings.
Aberdeen Standard Investments (ASI) confirmed last week the LF ASI Income Focus fund would reopen under new managers Thomas Moore and Charles Luke, who are still in the process of offloading Woodford's favoured domestically-focused stocks and replacing them with more internationally-facing businesses.
Having "sold down [the] structurally challenged companies", as well as shifted to a larger average market cap, the LF ASI Income Focus fund already looks radically different from its previous iteration, with the top ten holdings entirely changed under Moore and Luke.
Notably, the pair has a differing approach to managing equity income portfolios.
Arguably the better-known of the two, Moore, who manages the £1.2bn ASI UK Income Unconstrained Equity and £195m AUM Aberdeen Standard Equity Income trust, has an investment philosophy defined as mid-cap value by Morningstar analysis.
Meanwhile, manager of the £167m ASI UK Income Equity fund Luke has a large-cap blend approach.
Director of manager research ratings in the UK at Morningstar Jonathan Miller explained the portfolio should be considered as having a "barbell approach that mixes capital growth and increasing dividends".
He added: "Although billed as a best ideas portfolio from the UK equity desk, there is a sense that with Moore and Luke as named managers, there will be a mix of holdings based on their historical underlying approaches.
"Luke comes from the Aberdeen camp that focuses on higher quality companies trading at attractive valuations, while Moore has considerable flexibility on his Unconstrained fund."
However, Miller explained Moore's preference for UK small- and mid-cap and domestic names "have contributed to underperformance in the past few years".
The Unconstrained fund has returned 3.8%, 9% and 16.6% over one, three and five years respectively, trailing the IA UK Equity Income sector, which has returned 12.2%, 16.5% and 21.8% respectively, according to FE fundinfo.
By comparison, the UK Income Equity fund, which Luke has managed since January 2016, has returned 20.3%, 24.9% and 35.5% over one, three and five years respectively. The UK Income Equity fund currently yields 3.7%, compared to the Unconstrained fund's 4.7%.
Miller said: "This is a really competitive sector with many long-established fund managers, so it will be worth monitoring the extent to which investors would rather move their money with them, or if they see this as a compelling option."
Head of research at Square Mile Investment Consulting & Research John Monaghan said that his research team "does not know Luke nor his fund management capabilities", but has "conviction in" Moore whose appointment "should reassure unitholders over the future of their investments".
He acknowledged Moore's Unconstrained fund "has struggled over the medium term", but said "overall we believe him to be a credible and passionate fund manager, who has a good level of experience of running high conviction UK equity income funds".
However, head of personal investing at Willis Owen Adrian Lowcock described the duo as "not the first choice for investors", adding there may be some selling activity now the fund has reopened.
He added: "They are well supported by a strong brand and a large UK equity team, which means this is less of a one-man show than it was under Woodford.
"[But] with so much uncertainty around the potential performance of the fund, there are plenty of alternatives to choose from with strong track records."
ASI told investors last week the portfolio transition process was "very close to completion", with the managers "confident the portfolio is best placed to deliver the fund's investment objective and add value for investors".
The portfolio revamp is likely to be a costly affair for ASI.
The firm identified Honeycomb investment trust, which was Woodford's third largest holding with a weighting of 6.2% in July 2019, as "relatively costly to dispose of", having set back performance by around 0.6%.
Its authorised corporate director Link Fund Solutions confirmed the costs associated with the repositioning of the fund added up to around 0.3% of the value of the fund as at 27 December.
Daniel Lockyer, senior fund manager at Hawksmoor Fund Managers, which invested in the Unconstrained fund "from its early days" and has high confidence in Moore, expects there could be "further costs incurred to reposition the portfolio and sell illiquid positions further downthe portfolio".
Honeycomb, for instance, was sold at a price of 850p, a 9.6% discount to its market price of 940p. "How many more of those are to come?," Lockyer asked.
He added: "Already [Woodford and ASI's] top-tens have zero commonality so expect that further down eventually. Hopefully most of that has been done, hence their approval to reopen the fund."
Lockyer also questioned the value of investing in the new fund, particularly when compared to the Unconstrained vehicle, adding he does not "see a compelling reason to buy this fund over [Moore's] other mandate".
Fees 'turning heads'
Despite this, Lockyer did welcome ASI and Link's decision to waive fees until May, which may "help offset any cost of dealing".
From 1 June, investors in the fund will pay a periodic charge of between 1% and 0.65%, depending on which share class they own.
Morningstar's Miller questioned ASI's approach to fees, adding investors in Moore's Unconstrained fund may be feeling short changed, with the firm having "pitched for and
won a mandate where fees are much lower".
He explained: "Three quarters of the assets in the 'new' Focus fund are in a share class that will have a fixed ongoing charge of 0.65%. Pretty much all the remainder sits in the 0.75% share class.
"Comparing that with the ASI UK Income Unconstrained fund, where depending on share class availability on platforms, the management fee alone is 0.8%
or a full 1%, we believe this will turn heads."
ASI noted that the Focus fund underperformed its benchmark FTSE All-Share index by 4% in January alone, putting that largely down to the costs of the portfolio transition alongside continued poor performance of inherited holdings such as Card Factory, which warned on profits during the month.