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Think carefully before leaving it in cash: Four fund ideas for Woodford investors

Posted by Adrian Lowcock in Press releases category on 10 Jan 20

After over 7 months the LF Equity Income fund, formerly known as the LF Woodford Equity Income fund, is due to begin selling investments and returning money to investors.  

Adrian Lowcock, Head of Personal Investing at Willis Owen warns against a knee-jerk reaction of leaving it in cash without considering what the money is for, and below gives investors four fund options to consider. 

Woodford Equity Income fund was seen by many investors as a core income holding. Now the question is what former Woodford investors should do with the proceeds. 

Mr Lowcock says: “Withdrawing the cash is one option and a perfectly understandable response given the issues investors have faced. However, it is important to think about what the money is for before investors make any decisions. 

“This option might be suitable for those who need the money soon or have decided that investing is too risky. The interest offered on most cash accounts is still very low and cash doesn’t offer any potential for significant growth. 

“There are plenty of excellent alternative UK equity income funds available for investors.” 

The UK equity income sector is a very competitive place and is full of experienced fund managers. Currently, the UK market is full of companies with high dividend yields presenting plenty of opportunities for income seekers, and the potential for growth.  

When investing it is important to make sure your investments are diversified across several different sectors, countries, asset classes and funds to help reduce risk.

Below we look at some of Willis Owen’s favoured UK equity income funds and a global one that we believe could be a good home for a former Woodford investor’s cash.

Threadneedle UK Equity Income - Richard Colwell is one of the best-known specialists in this sector. He runs a flexible fund to deliver a steady income along with some capital growth.  

The primary focus is on stock selection and at its core, the fund holds a blend of larger high-quality companies with strong cash generation which are expected to pay consistent dividends. This is complemented by out-of-favour companies with recovery potential, some of which may not currently pay a dividend.  

The fund predominantly invests in large blue-chip companies although Colwell will take significant sector bets against the index to match his thematic views.

We consider this a mainstream equity income fund run by a very experienced manager which could be suitable for most income portfolios. It aims to pay a high and growing income, as well as some long-term investment growth. Unlike some peers, Richard Colwell doesn’t invest outside the UK.

Franklin UK Equity Income - Veteran income fund manager Colin Morton aims to provide steady incremental growth. Morton’s process blends his views on the outlook of the economy and stock market with a valuation-aware approach to stockpicking. 

He focuses on large companies with strong and growing free cash flows, sustainable superior competitive positions in their industries, and attractive dividend yields and/or dividend growth. 

The fund may underperform in strong market rallies but its long-term performance is supported by its ability to protect in falling markets. We think it is a core income proposition.

This is a core fund for investors looking for steady long-term income. Morton is benchmark-aware and as such looks to build performance over the longer term.

Trojan Income - The manager, Francis Brooke, looks for stable and well-established businesses that he expects to reliably pay dividends year after year. He aims to preserve investor’s capital by careful risk management. 

Brooke uses strict criteria to identify high-quality companies that can produce steady, long-term income and capital growth. This conservative approach means there is a bias towards larger companies as well as more defensive areas of the market such as healthcare, whilst having a low exposure to cyclicals. 

Brooke invests in a fairly small number of companies so each one can have a significant impact on the performance of the fund, either positively or negatively.  

This fund offers the potential for solid income and growth over the long run. The focus on companies that tend to be more resilient does mean the fund could fall less than others when stock markets fall. However, it might not go up as quickly when stock markets rise though.

Fidelity Global Dividend - Dan Roberts has managed this fund since launch in 2012 with support from six other regional income specialists and Fidelity's extensive analytical research resource. Roberts’s philosophy is to focus on quality companies that can offer a good degree of capital protection during market downturns. 

This means the fund may lag in roaring bull markets but we are encouraged by the fact that it has outperformed during the manager's tenure. 

Initial screening of the investable universe followed by careful analysis of the shortlist allows Roberts to identify companies with stable finances and strong cash flows. This due diligence underpins the reliability of dividend pay-outs and the target yield is 125% of that on the benchmark MSCI ACWI Index.

Man GLG UK Income - Henry Dixon's proven value approach underpins this fund, it offers a highly disciplined value-focused approach to investing in UK equity income.  DIxon targets companies trading below the team's estimate of the company's asset value, and those where the company's profit stream is being undervalued relative to the cost of capital, with the additional caveat of a dividend yield of at least that of the market. 

The fund also targets companies with net cash balance sheets and strong free cash flows which can lead to positive dividend surprises. As well as the focus on valuation the process also seeks to steer the manager towards elements of quality and positive earnings momentum. 

Finally, the fund has a greater focus on mid-sized companies.