Alternative equity income options to Neil Woodford

Posted by Adrian Lowcock in Fund and industry updates category on 30 Jan 20


After more than seven months since its suspension the LF Equity Income fund, formerly known as the LF Woodford Equity Income fund, will shortly start to return money to unit holders. The money will be returned to you in a series of payments.

The first payment is expected on or around 30th January, the details of which were emailed to you earlier this week. We expect it to take a few days for the money to land in your platform account and we will be in touch to let you know when it does.

The Woodford Equity Income fund was considered a core income offering by many investors. The question now is what should you do with the proceeds?

Take the cash

Withdrawing the cash is an option and a perfectly understandable given the issues you have faced. However, it is important to think about what the money is for before you make any hasty decisions. If the money is in an ISA, withdrawing the cash will mean you will lose all the tax benefits of the ISA wrapper. The interest offered on most cash accounts is still very low and beyond the interest you may receive, cash doesn’t offer any potential for growth. This option might be suitable for those who need the money in the near future or who has decided that investing is too risky for them.

Reinvest

There are plenty of excellent alternative UK equity income funds available to choose from. The UK equity income sector is competitive and full of experienced fund managers. There are many UK companies currently offering high dividend yields presenting plenty of opportunities for income seekers, and there is of course the potential for growth (although clearly such growth is not guaranteed).

When investing it is important to make sure your investments are diversified across a number of different sectors, countries, asset classes and funds to help reduce risk. Below we look at some of our favoured UK equity income funds, and a global one, that you could consider:

Threadneedle UK Equity Income

Richard Colwell is one of the best-known specialists in this sector. He runs a flexible fund to a deliver a steady income along with the potential for some capital growth. The primary focus is on stock selection and at its core the Threadneedle UK Equity Income fund holds a blend of larger high quality companies with strong cash generation prospects, 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 to be a mainstream equity income fund run by a very experienced manager. It aims to pay a high and growing income, as well as offering some long-term investment growth potential. Unlike some peers, Richard Colwell doesn’t invest outside of 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 stock picking. 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 prospects for dividend growth. The Franklin UK Equity Income fund may underperform in strong market rallies but its long-term performance is supported by protective characteristics in falling markets (although clearly the value of investments in this fund may fall as well as rise).

We think this is a core proposition 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 through careful risk management. Brooke uses strict criteria, for the Trojan Income fund, to identify what he considers to be 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 performance of the fund, either positively or negatively.

This fund offers the potential for solid income and growth over the long run although clearly this cannot be guaranteed. The focus on companies that tend to be more resilient means 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 the Fidelity Global Dividend fund since launch in 2012 with support from six other regional income specialists and from Fidelity's extensive analytical research resource. Roberts’ philosophy is to focus on quality companies that he believes can offer a good degree of capital protection during market downturns although clearly the value of investments and any income from them can fall as well as rise.

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.

Important information: Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Nothing in this article is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment.