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UK equity income – fund managers on our radar

With the departure of Neil Woodford, Head of UK Equity at Invesco Perpetual and manager of two of the most popular funds in the UK, Invesco Perpetual Income and Invesco Perpetual High Income, our UK equity income analyst Mark Lane looks at the qualities that have made Woodford a star fund manager and other fund managers in the UK equity income sector that he rates highly.

Good fund managers avoid mistakes

During his 25-year fund management tenure Woodford has become synonymous with Invesco Perpetual and has built up a loyal following amongst UK investors and amassed considerably over £30 billion of assets under management.

Woodford offers a distinct investment style that focuses on identifying strong, stable and cashflow generative businesses and buying them on reasonable valuations. He has a very consistent approach and in some respects he is just as well known for what he didn’t own.

In the late 1990s, in the run up to the dotcom crash, Woodford was one of the most vocal UK fund managers warning about the valuations investors were paying for technology businesses. He stubbornly stuck to his disciplined investment process. The rumour is that it almost cost him his job – but the market blinked first. Similarly, prior to the Lehman’s crash of 2008, Woodford shunned banks - during 2007 he did not own a single one and was significantly underweight UK financials.

So, in the UK equity income sector, are there any managers with a comparable investment style or ability?

Mark Barnett – Invesco Perpetual Income (three stars)

Perhaps the best place to find an alternative for Woodford is his successor Mark Barnett. Barnett and Woodford have worked together for 17 years. Barnett was always likely to be Woodford’s successor, and given the stability of the team on the UK desk it should be a relatively easy handover.

We met Barnett in July this year and the overlap between the holdings of their portfolios is considerable; their top 15 stocks are almost identical. However, to date the lower level of assets that Barnett has been running gives him the ability to build more positions in mid and smaller companies.

We currently rate Barnett three stars and we see no reason to change this rating. Only time will tell if Barnett will keep his nerve in the same way that Woodford has but there is no reason to assume that he won’t.

Michael Clark – Fidelity MoneyBuilder Dividend (four stars)

This is perhaps the most suitable direct comparison with Neil Woodford. Clark also focuses on predictable companies that are able to increase cashflow generation and grow their dividend over time.

Like Woodford’s funds, Fidelity MoneyBuilder Dividend has one of the lowest levels of volatility amongst the peer group. Both fund managers would be expected to underperform in strongly rising markets while offering more protection to investors when markets fall.

Adrian Frost and Adrian Gosden – Artemis Income (five stars)

This is the third-largest fund in the sector and it shares some similar characteristics to Woodford’s with the managers taking a long-term view and the fund having a limited exposure to small caps. Frost and Gosden have also chosen to take advantage of IMA rules allowing them to invest in non-UK companies, specifically European pharmaceuticals which are also held by Woodford.

The Artemis fund does, however, employ a more pragmatic style than Invesco. Sector weightings versus the benchmark and style biases are less pronounced and consequently relative performance tends to be less volatile.

Leigh Harrison and Richard Colwell – Threadneedle UK Income (five stars)

Harrison and Colwell target companies that they deem attractive in their own right, typically those companies with good growth prospects and a growing dividend, whilst tilting the portfolio towards the macro-economic environment. The fund is also able to invest in mid and smaller companies which are an additional potential source of return.

On the whole, however, this is a conservatively run fund that consistently produces a decent income for investors.

Matt Hudson – Cazenove UK Equity Income (four stars)

A recent addition to our MAP funds, Matt Hudson employs a ‘business cycle’ approach to investment which is consistent with other Cazenove UK and European funds. Hudson is more focused on capital return than most of his peers and he will rotate the portfolio through the market cycle. In contrast to Woodford there are few stocks that Hudson would hold throughout the market cycle.

This will mean that there may be periods when the income produced by his portfolio is lower than the sector’s. However, since Hudson became the lead manager on this fund capital return has more than made up for the occasional period of lower yield.

John McClure – Unicorn UK Income (four stars)

And finally, something a little different. Unicorn UK Income invests entirely in small companies with fund manager John McClure researching the relatively smaller companies who are able to grow more quickly and pay a dividend.

Despite the focus on smaller companies the volatility of this fund is remarkably low. McClure invests in only the highest quality companies in the small-cap universe and consequently they tend to be less volatile and do well when markets fall. Portfolio turnover is typically low – with just one or two names changing annually.

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The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Funds may carry different levels of risk depending on the industry sectors in which they invest. You should ensure that you understand the nature of any fund before you invest in it. Smaller companies shares can be more volatile and less liquid than larger company shares, so smaller companies funds can carry more risk. Current or past yield figures provided should not be considered a reliable indicator of future performance. This article is not a personal recommendation or advice to invest.