Hundreds of thousands of people will be receiving cheques from administrators winding up Woodford Investment Management over the next few months. The question for many, after the failure of the industry’s one-time star manager, is who can they trust now.
Neil Woodford’s demise ranks as the biggest calamity to hit the retail fund management industry in decades. At its peak, the Woodford Equity Income fund brought in more than £10bn from loyal savers hoping for a repeat of the super-charged performance he enjoyed while at Invesco Perpetual.
Launched in June 2014, Woodford Equity Income performed well at first but began a slide soon after that made it far and away the worst performer among its peers. Over the past three years it has lost investors 35% of their money, a period during which other mainstream funds have earned 20% for their investors, and the best more than 30%.
Winding up will start on 17 January, and the money will be returned in chunks. The first payment could be made by the end of January after some of the easier-to-sell assets have been flogged. The unquoted and less liquid assets will be sold off over time. But it is not possible to predict when the sale process will be completed.
Investors nursing losses might be tempted to leave the cash in the bank, but interest rates are miserable; locking your money away for two years gets you a top rate of 2.2% a year at a specialist bank and only 1.5% if you would prefer the security of a well-known high street name.
If you are investing for the longer term and accept that your money may go down in value as well as up, what are the top-rated options the experts are picking now? Investors should always stick to the crucial rule, which is: never put all your eggs in one basket – the Woodford fund is testament to that.
The current star fund: Fundsmith Equity
Performance: Up 49% over three years, 150% over five years
Biggest holdings: Microsoft, PayPal, Estée Lauder
Terry Smith’s fund, launched in 2011, has enjoyed cracking returns from its portfolio of 20 to 30 global multinational firms. Smith’s philosophy is to invest for the long term in established businesses which are difficult to replicate, not carrying large amounts of debt and with a strong history of high returns on their operating capital.
Fundsmith Equity is the top-selling fund in the UK, with more than £18bn under management. “It has one of the best track records in its space and a strong following among advisers,” says fund researcher FE Trustnet.
One drawback for some might be Smith’s fifth biggest holding: Marlboro maker Philip Morris. In that case, you might prefer his Fundsmith Sustainable Equity fund, which has enjoyed a 28% total return since its launch in November 2017.
The other “star” manager at the top of buy lists currently is Nick Train, who has beaten even Terry Smiths’s performance with his Lindsell Train Global Equity fund, which is up 159% over the past five years and 60% over three years. Its current biggest holdings are Unilever, Diageo and Heineken.
Where to buy: Fundsmith minimum investment is £1,000 or £100 a month. Available on most DIY investment platforms or direct at fundsmith.co.uk. Expect total charges of around 1.5% a year. Lindsell Train Global Equity minimum is £1,500, with charges of about 1.3% at DIY platforms.
The new equity income stars? Lionwtrust Income
Performance: Up 25% over three years, 54% over five years
Biggest holdings: Micro Focus, Glencore, CMC
The likes of Terry Smith and Nick Train have soared on the back of rising global markets. If you would prefer to stick with UK companies (globally ignored because of Brexit) that pay decent dividends, you have to look at the UK equity income sector. Currently, Liontrust Income is top of the table over five years. It is a £300m fund run by Robin Geffen. Its most recent income payout was worth about 3.5% to investors.
Other notable names in the sector picked by Brian Dennehy of FundExpert.co.uk as alternatives to Woodford include Trojan Income and JOHCM UK Equity Income. “The JOHCM fund has grown the payout it pays to investors in nine of the last 10 years. On a total return basis (capital growth plus dividends) the fund has returned 147% over the last 10 years v 115% for the FTSE All Share.”
Where to buy: Minimum investments are usually £1,000 lump sum or £100 a month in a saving scheme. Try any of the DIY investment platforms. You pay one fee to the fund manager – usually about 0.5% to 0.75% – plus another fee to the platform – usually around 0.5% – to host the fund. Popular platforms include Hargreaves Lansdown, AJ Bell Youinvest, Interactive Investor and the Share Centre.
A cheap index alternative: Vanguard UK Equity Income Index fund
Performance: Up 13% over three years, 29% over five years
Biggest holdings: AstraZeneca, GlaxoSmithKline, Royal Dutch Shell
The idea with equity income is that a fund manager picks a selection of the best dividend-paying stocks, which the investor can then draw down as an income (about 3%-4% a year) or reinvest the money and see the capital roll up. What Vanguard does is automate the process, using computers to replicate the index and cut the cost of investing.
Vanguard is the world leader in index funds for small investors, and last week cut charges again – with some funds now on 0.06% a year.
But you don’t get a choice in what the computer picks, just what’s in the index. In the case of the UK equity income index fund, that means it is stuffed with oil and mining stocks, such as BP, Shell, BHP and Rio Tinto. You’ll also never get top performance – just what the market is giving, at a low charge.
Vanguard has a vast range of cheap index funds, and is always in the top selling lists for its life strategy funds, which offer a balance of global shares and bonds.
Where to buy: Small investors can buy at VanguardInvestor.co.uk. Minimum investment is £500 or £100 a month, and the charge is 0.15% a year plus the fee for the underlying fund, which in the case of its UK equity income index fund is 0.14%, making a total of 0.29% a year.
Investment trusts: Scottish Mortgage
Performance: Up 50% over three years, 125% over five years
Biggest holdings: Amazon, Illumina, Alibaba
Traditionally investment trusts were not sold by financial advisers as they didn’t pay commission. They have also tended to have lower charges, though they are not as cheap as the index trackers.
Scottish Mortgage, now £7.6bn in size, has nothing to do with mortgages, but invests in a wide range of global shares with a strong bias towards technology – Tesla, Netflix and Tencent are also among its big holdings. Note that funds with big tech holdings can be more volatile than mainstream funds.
Research group Fund Calibre picks City of London Investment Trust as its favourite alternative to Woodford, although its performance has been more pedestrian – 20% in the past three years. Chief executive Darius McDermott says the trust invests in large companies, and has an extraordinarily long history, 53 years, of increasing dividends to shareholders.
Where to buy: Open a DIY account at any of the platforms – iWeb is a particularly cheap, no-frills online broker and comes with the backing of Lloyds Bank. It costs £25 to open an account, then £5 per trade.