Interactive Investor

Should I buy Woodford Income Focus – or one of these five alternatives?

22nd March 2017 13:09

by David Brenchley from interactive investor

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It was reported on Tuesday that Neil Woodford's first fund launched under the Woodford Investment Management banner, CF Woodford Equity Income, passed the £10 billion of assets under management mark. This came the day after his third offering, Woodford Income Focus, was opened for business – and it is set to be just as popular with investors.

The offer period for the newest fund in the Woodford stable runs until 11.15am on 12 April at a fixed price of 100p. That gives investors a few weeks to decide whether they wish to invest.

Rebecca O'Keeffe, head of investment at Interactive Investor, points out that, as our regular most-bought funds and trust articles show, Woodford is one of the UK's most-popular fund managers – and he has a good track record, returning over 300% since the start of the millennium, according to FE Trustnet figures.

With the Income Focus fund aiming to produce an annual income of 5p per share for every £1 invested – that's equivalent to a yield of 5% – Woodford looks set to broaden his appeal with income-seekers eager to jump aboard. For comparison, his Equity Income fund currently yields 3.7%.

"This fund is likely to have significant appeal to investors looking for a home for their ISA, and for those who are looking for income in particular," says O'Keeffe.

What will Income Focus's portfolio look like?

Aside from the income gap, other key differences between the funds include the more concentrated nature of Income Focus – holding around 50 stocks – and which will invest only in quoted equities. Equity Income currently owns 124 and Patient Capital 73.

Income Focus is also likely to have a more international flavour, with Woodford keen to shed geographical constraints at his new fund. "That's because over the 30 years I've been running income funds I've found that the additional flexibility to invest internationally has been very helpful at times," he explains.

O'Keeffe says this is "extremely attractive" as it allows Woodford free reign in terms of how he positions his portfolio, which is potentially very good news for investors. That said, the manager says that non-UK equity exposure is likely to be less than 20% as UK equities remain his bread and butter.

There are also likely to be plenty of similarities with his Equity Income fund. Clearly, there will be more of an emphasis on companies already paying a decent yield but, of the 50 stocks in the model portfolio he's been tracking, Woodford says around 15-20 are currently held in Equity Income.

Therefore, Adrian Lowcock, investment director at Architas says, there is no need to hold both; rather, it is a case of choosing the fund which meets your needs. Income Focus is likely to suit those in retirement who need the income now.

"If you are comfortable with a lower income, but the potential for greater capital growth then the existing fund would be more suitable, but if you are more in need of a higher income then the new Income Focus fund will be much more appropriate," he adds.

Brian Dennehy, managing director of FundExpert, agrees that investors only need exposure to the one Woodford fund and that any new fund you add to your portfolio should "fulfil a need". However, forced to make a choice, he says would replace Equity Income with Income Focus "regardless of whether we were looking at this as an income or growth investor".

Proven alternatives to Woodford Income Focus

Woodford hasn't exactly shot the lights out with his current pair of eponymous funds – Equity Income's one-year performance of 13.9% puts it in the third-quartile of the Investment Association UK equity income sector. It has, though, returned 31.1% since launch compared to its sector and benchmark's 20%.

Woodford Patient Capital, his closed-ended vehicle, has not fared well at all, losing 10% in value since launch almost two years ago.

With that kind of return, investors could be forgiven for sitting out this launch initially and seeing how it performs. And there are plenty of alternatives out there that promise meaty yields and are proven performers. Despite Woodford's confidence that he will be able to produce the 5% income, Dennehy says that income generation is a matter of proof and shouldn't be taken on trust.

Both Dennehy and Lowcock say JOHCM UK Equity Income, run by managers James Lowen and Clive Beagles, is an outstanding alternative that has managed to grow its payouts in eight of the last 10 years, helped in 2016 by the devaluation of sterling.

Lowcock says the managers look for companies that have an above-average yield and will sell if the yield falls below that level. This process, he explains, forces them to sell as well as removing any valuation risk out of the fund.

Dennehy also highlights Schroder Income, managed by Kevin Murphy and Nick Kirrage, as another fund to have grown payouts in eight of the last 10 calendar years. The fund's approach of seeking companies that are not correctly valued by investors and not trying to time currency strength or weakness, has served investors well.

Other funds liked by Lowcock include Evenlode Income, where manager Hugh Yarrow "is not a slave to the dividend"; Fidelity Moneybuilder Dividend, which uses a modest amount of options to boost the income it produces; and MI Chelverton UK Equity Income, whose focus on small and mid-sized companies "should provide plenty of opportunity for dividends to grow".

Lowcock points out that these alternatives are complementary to Woodford as well, "so you don't need to sell Woodford, but can have a few funds to benefit from diversification in the important UK equity income sector".

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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