Should you invest in Neil Woodford's new fund?

Published by Rebecca Jones on 27 May 2014.
Last updated on 27 May 2014

Neil Woodford

Woodford Asset Management confirmed in early May that ex-Invesco star Woodford's new fund, CF Woodford Equity Income, will open for investment on 2 June, prompting announcements from a number of wealth managers and analysts that they will be investing in and recommending the fund.

These include Hargreaves Lansdown's head of research Mark Dampier, who says he believes Woodford "to be the finest fund manager of his generation". He adds: "I look forward to introducing his new fund to our clients."

Don’t be fooled by past performance

However, some industry professionals, including Chase de Vere's head of communications Patrick Connolly, are warning investors to be sceptical of such warm praise and blind faith in Woodford's fledgling fund. They reiterate that past performance is not an indicator of future returns.

"There is no guarantee when fund managers move that they're going to repeat the success they have had previously," says Connolly. He adds: "In a lot of cases, managers do well because their styles have been in favour for a long time, or they may have had a bit of luck. While I don't think that applies to Woodford, he is going to be working in a different environment with a different team and resources."

Kim Barrett, director at advisory firm Barrett Financial Solutions, echoes Connolly's concerns, drawing on a sporting analogy to illustrate his point. "You can compare fund managers to football managers: they have this big reputation, but just because they [deliver] goals for one team doesn't mean they will for another - it has got to be the right environment," he says.

Barrett also expresses concern at the seemingly 'superficial' decisions being made by wealth managers such as St James's Place, which recently placed more than £3.5 billion of assets pulled from Invesco Perpetual with Woodford Investment Management after Woodford announced his departure last October.

He says: "It seems odd. People are making these far-reaching decisions for their clients, but do their clients want this disturbance? It all seems a bit 'old boys' network’, and that's not how the industry should be now; it should be above that, if only from a regulatory point of view."

Vested interests

Connolly also advises investors to bear in mind the vested interests that some analysts and researchers may have in promoting Woodford's fund. "In many cases, they're trying to get new money into their company, and the only way they can do that is to promote funds," he says.

Brian Dennehy, managing director of, reminds investors that the performance of a new fund in the first 12 to 24 months is typically "driven by luck rather than the skill of the fund manager, even if it is Neil Woodford".

He adds: "The accident of when the fund is launched drives early performance, because we have no idea - let alone certainty - as to what will drive markets in that period."

Dennehy concludes: "Our view is that buying new launches is mostly pointless, unless the fund provides unique access to an asset class or strategy not available elsewhere, for example. This fund doesn't do either of those things, so we would wait at least six months before considering it, and then we would begin to compare its actual performance with the many alternatives."

Five established alternatives

If you aren't convinced by Woodford's new offering, here are five Money Observer Rated Fund alternatives.

Schroder UK Alpha Income

Formerly Cazenove UK Equity Income, the £898 million Schroder UK Alpha Income fund has been managed by ex-Cazenove director Matthew Hudson since its inception in 2005, during which time it has outperformed both its sector and benchmark - IMA UK equity income and the FTSE All Share index - by over 22%.

Hudson tends to sticks to traditional large-cap income stocks with his top-10 holdings including all the usual suspects: Shell, Rio Tinto, Glaxo, BP, Vodafone etc., with the odd punt on mid-cap names such ascable tie manufacturer Hellermann Tyton. With a yield of just under 4% and a steady history of consistent payouts, the fund is a solid income choice.

Threadneedle UK Equity Income

On a slightly lower yield of 3.5% is Leigh Harrison's £2.8 billion Threadneedle UK Equity Income fund, which since launch in May 2009 has also outperformed both the IMA UK equity income sector and FTSE All Share index, returning 110% compared to 94% and 90% from the latter.

It is also one of the more consistent funds in the sector, delivering first or second-quartile returns every calendar year since launch with below average volatility. The portfolio is a standard income bearer, however is underweight oil and gas stocks and is rather more concentrated than many of its peers with only 51 stocks.

Henderson UK Equity Income & Growth

The smallest fund of our selection, Henderson's £543.6 million UK Equity Income & Growth fund, has been a strong performer since its inception in 1974. More recently, it has produced top-quartile returns over one, three, five and 10 years, returning 156% since May 2004. That compares to 125% from the IMA UK All Companies sector that it recent joined, having been turfed out of the UK equity income sector for failing to meet strict yield requirements.

Since 2005 it has been managed by James Henderson, a long serving Henderson manager with a value-driven investment style. At 128 holdings the portfolio is well diversified and top stocks include both large-cap names such as BP and Rio Tinto as well as mid and small-cap players like Hiscox and Hill and Smith Holdings.

Invesco Perpetual Income

As Woodford's former fund, the enormous £7 billion Invesco Perpetual Income fund has a strong track record; over 10 years it beats every any other fund in the UK equity income sector with a return of 195%, while returns since January 1995 stand at a staggering 855% compared to 397% from the sector and 367% from the FTSE All Share index.

Woodford's former colleague Mark Barnett now runs the fund and boasts a strong track record of his own, delivering a sector-topping 245% over 10 years in his Perpetual Income and Growth Investment Trust. Woodford's defensive style means that Invesco Perpetual Income has underperformed over the past year as markets have rallied, however it has picked up a little under Barnett's watch, beating the sector over one and three months.

Rathbone Income

Managed by Carl Stick since 2000, Rathbone Income is another solid UK equity income selection. Capitalised at £818 million, the fund carries a yield of 3.6% and most of the its holdings - 56% - are FTSE 100 companies, although at 7% of the fund Stick does have a little more than some of his peers in small-cap companies.

Performance-wise the fund is top quartile over three and five years, however like other funds with a quality bias it has suffered over one year, returning 6.6% compared to 8.2% from the UK Equity Income sector. As markets have re-focused on quality in recent months the fund has picked up and its large exposure to the UK services and consumer products sectors should bode well going forward.

This feature was written for our sister website Money Observer

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