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Caspar Rock: Life after Woodford in UK equity income

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The announcement that Invesco Perpetual’s long-serving manager Neil Woodford will be leaving the company next April to set up his own investment management business surprised the industry. Neil has been at Invesco for over 25 years, managing the High Income and Income funds – a total of £30bn of assets – and serving as head of UK equities. He also manages the Edinburgh Investment Trust.

Mark Barnett will take over management of the two funds in April. He has worked with Neil for 17 years and has a similar philosophy and track record. He is currently managing £5bn of assets including the Invesco Perpetual Strategic Income fund which is similar to Neil’s with a 70 per cent overlap in stocks.

However, Neil was the key name behind the funds and even though there are few similar funds in the market, Neil’s departure might trigger substantial redemptions over the next six months.

Investor sales and redemptions might create an attractive discount and buying opportunity for shares in the Edinburgh Investment Trust. However, they could equally pose risks to the funds, which have significant stakes in many of the companies in the portfolios, large and small, as well as some unquoted companies:  42 per cent of the High Income fund is invested in shares where at least 8 per cent of the company is owned by Invesco as a house.

In light of this, it is important to monitor the liquidity of the funds, as certain companies’ share prices might be adversely affected by redemptions.

There is also a risk, though we expect it to be closely monitored, that redemptions could inadvertently push the fund’s private equity exposure upwards. It is currently 3.5 per cent of the portfolio and the regulatory limit is 10 per cent. These are very illiquid positions and probably cannot be sold at the same pace as the fund’s other holdings.

It comes as little surprise, therefore, that we have been receiving queries from advisers as to what other alternative funds in the UK equity income space are attractive. Neil Woodford’s funds are used in one of two ways: as a core UK equity fund with an income bias and for low-beta equity exposure. Depending on which characteristic investors are seeking, there are various options available.

An alternative core UK equity fund might be the Rathbone Income fund, which has an emphasis on capital protection rather than minimising tracking error. Alternatively, there are the Artemis Income, Threadneedle Income and RWC Income Opportunities funds.

For low-beta exposure, investors might look at the Trojan Income fund, which focusses on capital preservation and absolute return, or the Fidelity Moneybuilder and Fidelity Enhanced Income funds, both of which are defensive with a long-term focus on capital preservation and income stability.

Lastly, investors might want to consider passive solutions. There are several smart beta providers in the market at the moment that are tilting their portfolios towards defensive, quality, income-generating stocks. While Woodford’s announcement was unexpected, there is a wide variety of options available to investors in his wake.

Caspar Rock is chief investment officer at Architas

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