Neil Woodford is one of the UK’s top fund managers. His equity income fund has commonly featured in the ranks of the best performing and most-owned equity income funds among UK investors.
However despite Woodford’s legacy, I’m not buying any of his fund offerings for my ISA this year. That’s because I believe there are better, cheaper options out there.
One of a kind
Historically, Woodford outperformed the market thanks to his contrarian views, focus on income stocks and unrivalled ability to be able to pick winners, particularly small-caps and early-stage private businesses. The focus on defensive income plays and growth stocks allowed Woodford to outperform over the long run while peers chased short-term gains, buying into the hottest stocks of the moment. The latter strategy works when markets are rising, but struggles when markets become volatile.
The strategy of buying defensive income stocks is still, in my opinion, the right one if you want to profit in all markets. But it can be replicated easily without buying, and you can replicate the strategy without taking the risk that Woodford picks another dud.
For example, the Vanguard FTSE UK Equity Income Index Fund only charges an annual management fee of 0.22% and currently supports a dividend yield of 4.84% compared to the Woodford Equity Income fund yield of 3.8% and annual charge of around 1%. If you’re looking for global income, the Vanguard Global Equity Income Fund currently yields 3% and only charges 0.6% per annum. A blend of this global fund and the UK-focus income fund gives Woodford a run for his money when it comes to cheap income.
As well as income, Woodford is also known for his ability to pick growth stocks. This is something investors can also replicate by buying a small-cap-focused fund. I believe this is a better option because these fund managers are more focused, allowing them to concentrate on finding the best small-caps without being distracted. Take the Standard Life UK Smaller Companies fund for example, which is managed by Harry Nimmo. He has achieved a total return for investors of nearly 1,000% since 2003. Charging 1.1% per annum, Nimmo’s offering is slightly more expensive, but his performance makes it one of the funds worth paying up for.
Time to turn your back on Woodford?
There’s no denying that Neil Woodford is a successful fund manager, and despite his recent setbacks, I believe his focus on defensive income stocks will pay off over the long term. That said, I believe it’s possible to create a cheaper, higher-yielding alternative to his offering that may perform better due to wider diversification and more focused stock picking.
Buying low-cost passive investment funds is a strategy that has also been recommended by the world’s best investor, billionaire Warren Buffett. And while most investors are unlikely to become billionaires themselves, by following just a few key rules, you should have no problem growing your wealth and hitting your savings targets, whatever they may be.