Where to invest after Woodford

Neil Woodford was Britain’s most well-known fund manager and a bedrock of thousands of investor portfolios for more than three decades.

But the galling oversights on liquidity have resulted in many seeing significant losses on their investment, something which in turn has damaged trust levels in the active management industry.

I do not relate what happened to Woodford IM to the wider active management industry

After waiting more than six months to see how much of their investment they would get back, investors finally saw the first tranche of their investment returned at the end of January, receiving between 46.4p and 58.9p per share, depending on which share class they held.

The question now is what do investors do with that money?

Key Points

• Losses created by Neil Woodford should not put people off investing
• There are many other options out there for clients who want to invest
• Investors can still receive income from a variety of regions

I expect some will not want to invest again and will simply place their money into cash accounts.

However, for me that would be a big mistake given we are in a low interest rate world, with the current UK base rate at 0.75 per cent and unlikely to increase any time soon.

Anyone investing for a reasonable length of time will suffer as consumer prices will increase, negating any returns.

I do not relate what happened to Woodford IM to the wider active management industry – it is a failure of an individual manager rather than the shortcomings of the industry.

The majority of active managers will continue to do as they have done in the past: take advantage of valuations opportunities in the market.

That is the best way to achieve both growth and income in this environment and many have an exceptional track record of doing just that.

With this in mind, here are a few alternative income options for investors looking for a new home for their savings.

Traditional UK equity income players

Going into a traditional UK equity income fund with a focus on the FTSE 100 would be the logical route, given it has been so successful in the past for investors.

The dividend yield of the FTSE 100 at the end of 2019 was 4.4 per cent, which is higher than the historical average yield.

Investors may want to consider a couple of experienced players in the market, such as the Artemis Income fund, managed by Adrian Frost, Nick Shenton and Andy Marsh.

Mr Frost is a veteran who established a great track record before joining Artemis in 2002.

The fund typically holds between 50-70 stocks and has a bias towards large-cap equities (currently 81.3 per cent).

The fund, which has yield of 4.3 per cent, has returned 153.7 per cent to investors in the past decade alone.

Another experienced manager to consider is Martin Cholwill, who has managed the Royal London UK Equity Income fund since 2005.

Mr Cholwill seeks to build portfolios for all market conditions, by prioritising stocks with free cash flow and avoiding overvalued stocks.

This means that his holdings should offer increasing dividends, while generating a good total return for investors. The 40-60 stock portfolio has returned 202.6 per cent to investors over the past decade, with a historic yield of 4.5 per cent.

Multi-cap income offers investors diversification

While there is little doubt that the FTSE 100 offers the best dividend returns, there may be those who want to diversify given the concentration of dividends paid by the top 15 companies in the blue-chip index remains worryingly high (58 per cent).

For this, I would turn to the likes of the LF Gresham House UK Multi-Cap Income fund or the Marlborough Multi-Cap Income fund.

The Gresham House vehicle is run by Ken Wotton, a specialist in the small-cap space, with the fund investing in 40-70 positions with almost three-quarters (74 per cent) of its holdings in small or micro-cap companies.

His top 10 includes the likes of a tenpin bowling operator and manufacturer and supplier of Kettle safety controls.

The fund has returned 42.1 per cent since its launch in June 2017 and has a yield of 3.5 per cent.

Going global

While global equity income funds may not have the yields to match their peers in the UK, they do offer diversification – given there are almost 2,500 dividend-paying companies to choose from – and the opportunity to get involved in an early and growing income stream, which is something we are big fans of.

For this I would recommend the likes of the BNY Mellon Global Income fund, a value-biased global equity income fund designed to generate a yield at least 25 per cent greater than that of the global stock market.

Another fund worth looking at is the Fidelity Global Dividend fund, managed by Dan Roberts, which has a strong focus on capital protection.

The conservative and multi-asset routes

Those who are particularly wary of incurring losses may want to opt for a more conservative vehicle, like the Jupiter Distribution fund.

Managed by Rhys Petheram and Alastair Gunn, the fund focuses on risk control and capital preservation, while also offering a monthly income.

It has an approximate 70:30 ratio between holdings in fixed income and equities, with the allocation actively managed.

The fund typically has more than 100 holdings to ensure diversification, and has a yield of 3 per cent.

Other income-yielding multi-asset funds investors may like include the VT Seneca Diversified Income or Close Managed Income funds.

The Seneca fund has a value-focused style and will invest across all asset classes including UK and overseas equities, fixed income, property and specialist investments held through third-party funds. 

The Close Managed Income fund also sits on the conservative side of the risk spectrum, with preservation of capital a strong focus alongside income generation.

Hopefully one or all of these should go some way to restoring confidence among nervous investors.

Darius McDermott is managing director of FundCalibre